Carillion's results, borrowing, funding and dividends, 2014–2018

analysisCarillion plc's 2014 annual report, whose chairman's statement is dated 4 March 2015, reported total revenue unchanged at £4.1 billion and reported profit before taxation up 29 per cent to £142.6 million (2013: £110.6 million); the audit committee report in the same document gives group revenue of £4,071.9 million (2013: £4,080.9 million) and underlying profit before tax of £172.9 million (2013: £174.7 million). Net borrowing was £177.3 million at 31 December 2014 (2013: £215.2 million), after the £38.5 million impact of two bolt-on acquisitions in Canada, and the convertible bond issued in December 2014 raised an additional £170 million, taking total available funding to approximately £1.3 billion. At the end of 2014 the group had 42,367 employees (2013: 41,304) and the board five male and two female directors. Philip Green, described by the committees' May 2018 report as a non-executive director from June 2011 and Chairman since May 2014, signed the chairman's statements of both the 2014 report and the 2016 report (dated 1 March 2017), each of which lists Philip Green as Chairman among the non-executive directors. These are Carillion's reported figures: the Pensions Regulator (TPR) later stated that its assessment of material obtained and shared by other agencies indicated that Carillion PLC had published misleading information about its financial performance between July 2015 and July 2017, and on 12 May 2026 the Financial Reporting Council (FRC) announced that two former Group Finance Directors of Carillion plc had accepted misconduct in preparing accounting information material to reported performance between 2013 and 2016 inclusive and the half year to 2017, each admitting recklessness and a failure to act with integrity, with no finding or admission of dishonesty. ^{1 2 3 4 5}

analysisThe consolidated balance sheet at 31 December 2014, approved by the board on 4 March 2015 and signed on its behalf by Group Finance Director Richard Adam, showed total assets of £3,890.4 million, including intangible assets of £1,610.8 million, trade and other receivables of £1,325.4 million and cash and cash equivalents of £472.0 million. Against them stood trade and other payables of £1,727.1 million, borrowing of £35.3 million (current) and £614.0 million (non-current) and retirement benefit liabilities of £515.8 million, leaving net assets of £894.5 million (2013: £983.6 million). The five-year review in the same report shows intangible assets rising from £1,221.2 million in 2010 to £1,610.8 million in 2014, and the net retirement benefit liability, net of deferred tax, rising from £182.1 million in 2010 to £406.2 million in 2014. The parent company's own balance sheet, also signed by Richard Adam, showed investments in subsidiary undertakings and joint ventures of £1,889.4 million, net current liabilities of £267.2 million (2013: net current assets of £221.8 million), borrowing due after more than one year of £435.0 million and net assets of £1,187.2 million; Carillion plc then had undrawn committed borrowing facilities of £722.0 million (2013: £550.5 million), £714.9 million of them expiring in two to five years, and borrowings in foreign currencies of £257.9 million (US dollars £195.6 million, Canadian dollars £54.4 million, UAE dirhams £7.9 million). ¹

analysisFor 2016, Carillion's annual report, whose strategic report was approved on 1 March 2017, reported total revenue of £5.2 billion (2015: £4.6 billion), group revenue of £4.4 billion (2015: £4.0 billion), underlying profit before taxation of £178.0 million (2015: £176.5 million) and reported profit before taxation of £146.7 million (2015: £155.1 million), with underlying earnings per share of 35.3p and basic earnings per share of 28.9p (2015: 30.9p), an order book of £16.0 billion (2015: £17.4 billion) and a pipeline of contract opportunities of £41.6 billion. By geography, the United Kingdom provided £3,831.1 million of total revenue (74 per cent), Canada £596.4 million (11 per cent) and the Middle East and North Africa £786.7 million (15 per cent); by segment, support services revenue was £2,712.7 million, Middle East construction services £668.3 million (Oman 31, Dubai 31, Qatar 29, Abu Dhabi 5 and Saudi Arabia 4 per cent) and construction services excluding the Middle East £1,520.2 million. At 31 December 2016 cash and cash equivalents of £469.8 million stood against bank overdrafts of £2.1 million, bank loans of £145.9 million, finance lease obligations of £15.6 million and other loans of £525.1 million, giving gross borrowing of £688.7 million and net borrowing of £218.9 million (2015: £169.8 million); average net borrowing for 2016 was £586.5 million (2015: £538.9 million). The net retirement benefit liability, net of deferred taxation, was £663.2 million (2015: £317.6 million) and net assets £729.9 million (2015: £1,016.6 million). These too are Carillion's reported figures: TPR later stated that its assessment of material obtained and shared by other agencies indicated that Carillion PLC had published misleading information about its financial performance between July 2015 and July 2017, and the FRC announced on 12 May 2026 that two former Group Finance Directors had accepted misconduct in preparing accounting information material to reported performance between 2013 and 2016 inclusive and the half year to 2017, each admitting recklessness and a failure to act with integrity, with no finding or admission of dishonesty. ^{4 2 3}

analysisCarillion's balance sheets also show what it owed to suppliers and other creditors. At 31 December 2016 current trade and other payables totalled £2,090.1 million, including trade payables of £749.2 million (2015: £591.4 million) and other creditors of £760.5 million (2015: £561.7 million); at 30 June 2017 trade and other payables were £1,999.8 million. TPR's report describes the interim 2017 accounts, the last published before insolvency, as listing trade creditors of approximately £2 billion and bank debt of just below £1 billion. The UK Government was the group's major customer: Carillion's 2017 half-year accounts give revenue from it of £1,719.0 million in 2016 (support services £861.3 million, public-private partnership (PPP) projects £174.5 million and construction services excluding the Middle East £683.2 million) and £856.1 million in the first half of 2017 (first half of 2016: £1,009.0 million). ^{4 6 2}

analysisThe committees' May 2018 report states that KPMG, as auditor, signed off Carillion's accounts with an unmodified opinion each year and that, until July 2017, there was little public information to suggest they presented anything other than a true and fair picture; the 2014 and 2016 annual reports name KPMG LLP as auditor. In the strategic report of the 2016 annual report, approved on 1 March 2017, the board stated that its review included a forecast of the covenants on the group's bank facilities and private placement funding, that the directors had a reasonable expectation that the company and the group had adequate resources to continue in operational existence for the foreseeable future, and that there were no material uncertainties in relation to going concern. Carillion issued its profit warning on 10 July 2017. ^{5 1 4}

analysisThe House of Commons committees' May 2018 report states that Carillion's borrowing increased from £242 million in December 2009 to £689 million in December 2016 and that its debt-to-equity ratio reached 5.3 by December 2016, considerably above the ratio of 2 that the committees described as widely considered acceptable. The committees' figures come from Carillion's published accounts, the £689 million corresponding to the gross borrowing of £688.7 million in the 2016 annual report; the assessment of the ratio is the committees'. Philip Green told the committees that 'the board consistently challenged management on debt, and management then developed a so-called self-help plan to reduce debt', while also expressing regret that the board 'did not reduce net debt sooner'. The committees add that the accumulation of debt, and Carillion's inability to reduce it, concerned investors: Standard Life Investments began selling its shares from December 2015 onwards, citing a high debt burden unlikely to fall in the near term because of acquisitions and a high dividend pay-out, and in early 2015 UBS claimed that total debt was higher than Carillion was publicly stating, triggering a big increase in short selling of Carillion's shares. This is the committees' account of investors' evidence; UBS's analysis and Carillion's handling of it belong to the account of Carillion's accounting. ^{1 2}

analysisIn a letter of 21 February 2018 to the chairs of the Work and Pensions and Business, Energy and Industrial Strategy Committees, former Group Finance Director Zafar Khan stated that Carillion's average net debt, on a monthly basis, had increased from £41.8 million in 2010 to £586.5 million in 2016; that on an intra-month basis the 2016 position would have been about £150 million higher than the monthly average, broadly consistent with the net interest expense of £37.1 million paid in 2016; that the peak funding requirement in 2016 was higher still; and that the year-end debt figure, to which Richard Adam's answer to the committees related, did not reflect the much higher debt levels experienced during the rest of 2016. The letter describes the level of debt allowed to grow in previous years as the principal contributing factor to Carillion's difficulties in 2017. This is Zafar Khan's own account as a party to the inquiry, and the intra-month estimate is Zafar Khan's; Carillion's 2016 annual report gives year-end net borrowing of £218.9 million and average net borrowing of £586.5 million for 2016. Richard Adam, Group Finance Director until the end of 2016, stated in a response published by the committees on 12 July 2018 a belief that the evidence the committees heard and read did not justify their conclusions about Richard Adam's role before retirement in 2016. ^{3 2 4}

analysisCarillion's 2014 annual report gives total available funding of £1.3 billion: committed bank facilities of £850 million, of which £785 million matured in 2018 and which included a £770 million five-year syndicated facility and £80 million of bilateral facilities, at floating rates; private placement funding of £314.5 million expiring between 2017 and 2024; and £170 million of convertible bonds maturing by 2019. In the first half of 2014 the group had increased its borrowing capacity with two separate £15 million bilateral facilities, one with Barclays and one with the National Bank of Abu Dhabi. The board's 2014 going-concern review included a forecast of the covenants on the bank facilities, private placement and convertible bond funding. The syndicated multicurrency revolving credit facility, £770 million in the 2014 annual report and £790 million in the 2016 report, carried change-of-control terms set out in both reports: any lender could, within a 30-day consultation period, cancel its commitment, with cancellation and repayment three days after that period, and the company had to offer to prepay its private placement notes with accrued interest; the 2014 report adds that holders of the £170 million convertible bonds could then require redemption at principal with accrued interest. ^{1 2}

analysisThe convertible bonds were issued on 12 December 2014 by Carillion Finance (Jersey) Limited, a wholly owned subsidiary of Carillion plc incorporated in Jersey: £170 million of senior unsecured bonds, guaranteed by Carillion plc and subject to a negative pledge, with a coupon of 2.50 per cent a year payable semi-annually. The initial conversion price of £3.9856, a 25 per cent premium to the volume-weighted average share price between launch and pricing, made them convertible into 42,653,553 ordinary shares, about 9.9 per cent of the issued share capital before the offering; unless previously redeemed, converted or cancelled they were to be redeemed at par on or around 19 December 2019, and on conversion the company could deliver shares, pay a cash alternative or combine the two. The borrowing note of the 2016 annual report records that at inception the proceeds comprised a derivative liability component of £13.4 million and a debt component of £156.6 million, and that the debt component was £162.2 million at 31 December 2016, including £5.6 million of interest accretion. Coupon payments and interest accretion on the bonds of £7.1 million and private placement interest of £14.3 million (2015: £14.3 million) were charged in 2016. ^{2 1}

analysisThe 2016 annual report shows £360.8 million of private placement financing at fixed rates in eight tranches: US$25.0 million at 3.85 per cent (November 2017), £49.0 million at 4.38 per cent (September 2018), £17.5 million at 3.62 per cent (August 2019), US$80.0 million at 4.29 per cent (November 2019), £51.0 million at 5.10 per cent (September 2021), £17.5 million at 4.19 per cent (August 2022), US$140.0 million at 4.86 per cent (November 2022) and US$35.0 million at 5.01 per cent (November 2024). The US$280 million of private placement finance came from a number of United States-based investors and was hedged with cross-currency derivatives fixing interest and capital repayments at the exchange rates prevailing when it was secured in 2013. According to the same report, funding at 31 December 2016 comprised committed bank facilities of £870 million (the £790 million five-year syndicated facility maturing in November 2020 and £80 million of bilateral facilities, both at floating rates linked to the London Interbank Offered Rate and the Canadian Dollar Offered Rate), private placement borrowing of £361 million and £170 million of convertible bonds at 2.5 per cent, together £1.4 billion. In January 2017 a further £112 million of five-year funding was raised in the German Schuldschein market (privately placed loans under German law) to replace £116 million maturing in 2017, taking available funding to some £1.5 billion, most of it maturing in November 2020 and beyond. Undrawn committed facilities were £731.6 million (2015: £761.2 million); bank loans of £145.9 million were largely unsecured, £3.7 million being secured on the related assets; and money market and short-term overdraft facilities were also available to Carillion plc and certain subsidiaries. ²

analysisCarillion plc's own financial statements record the guarantees it gave as parent company. At the end of 2014 it had guaranteed subsidiaries' borrowings of £203.9 million (2013: £23.1 million), deferred equity payments in PPP special purpose entities of £117.6 million and bank letters of credit for PPP customers' performance contracts of £35.0 million. In both 2014 and 2016 it gave guarantees and counter-indemnities to financial institutions for performance and other contract-related bonds and to certain defined benefit pension schemes for deficit recovery payments; in 2016 it also gave performance guarantees for subsidiaries, joint ventures and joint arrangements and guaranteed the £170 million convertible bonds issued by its wholly owned subsidiary Carillion Finance (Jersey) Limited. At 30 June 2017 the group's guarantees of bank letters of credit for deferred equity payments, joint-venture interest payments and PPP performance contracts totalled £81.5 million (31 December 2016: £103.5 million). ^{1 2 3}

analysisCarillion's 2014 annual report refers to its acquisitions of Mowlem plc in 2006, Alfred McAlpine plc in 2008 and Eaga plc in 2011, and Companies House records identify the companies bought. Carillion JM Limited (company number 00077628) was named John Mowlem & Company PLC until 31 December 2002, Mowlem PLC until 25 April 2006 and Mowlem Limited until 24 May 2006; Carillion (AM) Limited (01367044) was Alfred McAlpine PLC from 4 February 1985 to 12 February 2008 and Alfred McAlpine Limited until 18 March 2008; and Carillion Energy Services Limited (03858865) was Eaga PLC from 27 February 2007 to 20 April 2011 and Eaga Limited until 13 June 2011. The 2014 report also records a non-operating charge of £9.9 million (2013: £0.7 million) for costs associated with the aborted merger discussions with Balfour Beatty plc and the acquisition of a 60 per cent interest in Rokstad Power Corporation. ^{1 2 3 4}

analysisAccording to the committees' May 2018 report, Carillion bought Mowlem for £350 million in 2006 and Alfred McAlpine for £565 million in 2008, taking on responsibility for their pension scheme deficits, and in 2011 bought Eaga, a supplier of heating and renewable energy services, which had made accumulated profits of £31 million before the purchase and then five consecutive years of losses totalling £260 million by the end of 2016; the committees, who called the Eaga purchase 'disastrous', said it cost Carillion £298 million. They also state that Carillion funded its acquisitions through debt rather than equity: borrowing increased substantially between 2006 and 2008 as Mowlem and Alfred McAlpine were bought, and almost trebled between 2010 and 2012 to help fund the Eaga purchase. These are the committees' figures and characterisations; the acquired companies are now Carillion JM Limited, Carillion (AM) Limited and Carillion Energy Services Limited. Philip Green told the committees of regret that the board 'did not reduce net debt sooner' and conceded that it had been too slow to explore raising equity rather than relying on debt. ⁵

analysisThe committees state that Carillion purchased Mowlem, Alfred McAlpine and Eaga for substantially more than their tangible net assets and recorded goodwill of £431 million from Mowlem, £615 million from Alfred McAlpine and £329 million from Eaga, each higher than the purchase price; they noted that these figures are the arithmetic difference between price and net tangible assets, so their accuracy depends on the appropriateness of the price paid. This is the committees' analysis and characterisation. Carillion's 2014 annual report shows group intangible assets of £1,610.8 million at 31 December 2014. A governance case study gives different figures, £512 million of goodwill added by the Mowlem purchase, an acquisition price of £554.5 million for Alfred McAlpine and goodwill of £329.1 million on Eaga, and the retained records do not explain the differences from the committees' £431 million and £565 million. Richard Adam, Finance Director from April 2007 to December 2016, wrote to the committees on 20 February 2018 that Alfred McAlpine's net liabilities of £50.1 million at acquisition and the resulting goodwill of £615 million are set out in note 32 of Carillion's 2008 annual report, that the value and rationale of the acquisition were set out in the market announcement of 10 December 2007, and that cost savings of £100 million were, in Richard Adam's belief, achieved, as reflected in the 2008 and 2009 annual reports. Carillion's 2017 half-year accounts later recorded a goodwill impairment of £134 million in respect of the UK and Canadian construction businesses: £123.5 million for UK construction, after a value-in-use review prompted by poor first-half trading and the decision to stop undertaking construction in the UK PPP market, and £10.5 million for construction activities in Canada, after the decision to exit that market. ^{5 4 6 7 8}

analysisCarillion's dividend per share rose each year from 2013 to 2016. For 2014 the board recommended a final dividend of 12.15 pence per share, payable on 12 June 2015, making a proposed full-year dividend of 17.75 pence (2013: 17.50 pence), an increase of one per cent despite lower underlying earnings per share, with dividend cover of 1.9 times (2013: 2.0 times). The 2014 cash flow statement shows dividends of £75.7 million paid to equity holders of the parent (2013: £74.6 million), deficit pension contributions of £46.0 million and net cash flows from operating activities of £123.8 million (2013: outflow of £78.4 million). For 2016 the board proposed a final dividend of 12.65 pence (2015: 12.55 pence), a total of 18.45 pence (2015: 18.25 pence), with full-year cover of 1.9 times underlying earnings per share under a progressive dividend policy; it was to be paid on 9 June 2017 to shareholders on the register on 12 May 2017, subject to approval at the annual general meeting on 3 May 2017. The 2017 half-year accounts show dividends of £54.4 million paid to equity holders of the parent in the first half of 2017 (£55.0 million including non-controlling interests). ^{1 2 3 4}

analysisAccording to the committees' May 2018 report, board minutes of 26 January 2017 show that Zafar Khan, then Finance Director, proposed withholding the 2016 final dividend to conserve cash and reduce debt, but faced opposition from Andrew Dougal, chair of the audit committee, and Keith Cochrane, then senior independent non-executive director, who were concerned about the message withholding would send to the market. Keith Cochrane suggested it might be appropriate to send a message about debt reduction 'at the right time' and told the committees that management were committed to reducing average net debt after paying the dividend. The minutes of 28 February 2017 record only that the board recommended a dividend of 18.45p per share, which is the full-year figure for 2016 (the final dividend was 12.65p). This is the committees' account of the minutes, from which they concluded that other considerations, including the debt burden, were over-ridden. Zafar Khan's letter of 21 February 2018 states that before accepting the Finance Director role Zafar Khan sought comfort that the board would support making debt reduction a priority in 2017. In responses published by the committees on 12 July 2018, Keith Cochrane did not accept many of the report's conclusions and Andrew Dougal disagreed with many of them, both declining to comment in detail during ongoing investigations. The 2016 final dividend, £55 million according to the committees, was paid on 9 June 2017, one month before dividends were suspended entirely in the July 2017 profit warning. On 4 October 2023 the Insolvency Service gave, among the grounds for Richard Howson's disqualification undertaking, that Richard Howson caused Carillion to make the 2016 final dividend payment of £54.4m, paid on 9 June 2017, which Richard Howson ought to have known could not be justified by reference to the FY2016 financial statements and was not one Carillion could reasonably afford in view of its true financial performance. ^{4 2 5 6 7}

analysisThe committees compared dividends with pension funding. On their analysis of the annual reports' cash flow statements, Carillion paid £441 million in dividends over the six years 2011–2016 compared with £246 million in pension scheme deficit recovery payments, and across Richard Adam's ten years as Finance Director deficit recovery payments increased by 1 per cent whereas dividends increased by 199 per cent; the committees argued that funding pension schemes is an obligation and paying dividends is not. Keith Cochrane denied to the committees that dividends were given priority; Richard Adam answered that from 2012 to 2016 dividends increased by only 12 per cent whereas pension payments increased by 50 per cent; and TPR told the committees that Carillion's ratio of dividend payments to pension contributions was better than other FTSE companies. TPR's later regulatory intervention report concluded that, had the 2015 and 2016 dividends been withheld, it did not automatically follow that the schemes would have received additional payments, given the group's bank debt and other creditors. ^{4 8 9}

analysisCarillion's results for the six months to 30 June 2017, approved on 29 September 2017, reported total underlying revenue of £2,498 million (first half of 2016: £2,487 million), underlying profit before taxation of £50 million (first half of 2016: £85 million) and a reported loss before taxation of £1,153 million (first half of 2016: profit of £84 million), a basic loss per share of 261.2p and net debt of £571 million (first half of 2016: £291 million). The results left unchanged the £845 million provision for construction contracts announced with the profit warning of 10 July 2017, added a £200 million provision for support services contracts and a £134 million goodwill impairment for the UK and Canadian construction businesses, and suspended 2017 dividends. Non-recurring operating items of £1,189.5 million comprised £668.0 million in construction services excluding the Middle East, £313.9 million in Middle East construction services and £208.1 million in support services, and the reconciliation runs from underlying profit before taxation of £50.3 million to a reported loss of £1,153.3 million. Carillion treated the contract provisions of £1,045.5 million recorded in the interim accounts as changes in estimate under IAS 8 (the international accounting standard on changes in accounting estimates and errors), recognised them as current-period items and did not restate comparative amounts for prior-period errors; that was Carillion's own accounting position as published in September 2017. Two later statements bear on these figures: TPR stated that its assessment of material obtained and shared by other agencies indicated that Carillion PLC had published misleading information about its financial performance between July 2015 and July 2017, and the FRC announced on 12 May 2026 that two former Group Finance Directors had accepted misconduct in preparing accounting information material to reported performance between 2013 and 2016 inclusive and the half year to 2017, each admitting recklessness and a failure to act with integrity, with no finding or admission of dishonesty. ^{1 2 3 4}

analysisCarillion's condensed balance sheet at 30 June 2017 showed total assets of £3,669.4 million and total liabilities of £4,074.6 million, giving net liabilities of £405.2 million (31 December 2016: net assets of £729.9 million). Liabilities included trade and other payables of £1,999.8 million, borrowing of £36.9 million (current) and £924.3 million (non-current), provisions of £221.2 million (current) and £70.3 million (non-current) and retirement benefit liabilities of £721.5 million. Bank loans had risen to £321.3 million (31 December 2016: £145.9 million), other loans were £627.6 million and cash £390.4 million, for net borrowing of £570.8 million; the committees' May 2018 report summarises the position as net liabilities of £405 million and borrowing of £961 million. Cash used in operations was £270.1 million in the first half of 2017 (first half of 2016: £38.4 million used; full year 2016: £115.5 million generated), and dividends of £54.4 million were paid to equity holders of the parent (first half of 2016: £54.0 million; full year 2016: £78.9 million). The interim review states that these items, together with paying the 2016 final dividend in June 2017, meant that net borrowing rose to £571 million at 30 June 2017, with average net borrowing of £694 million in the first half. ^{1 2}

analysisThe half-year report's funding table at 30 June 2017 lists committed borrowing facilities of £835 million maturing in 2020, private placement borrowing of £350 million (£135 million and US$280 million) maturing between 2017 and 2024, Schuldschein borrowing of £112 million (£60 million, US$27 million and €35 million) maturing in 2020 and 2022, and convertible bonds of £170 million maturing by November 2019. The committed bank facilities and private placement notes carried two financial covenants: leverage (net debt to EBITDA, earnings before interest, tax, depreciation and amortisation, as defined in the facility agreements) of no more than 3.5 times and interest cover (operating cash flow to net interest) of no less than 3.5 times. The report states that the group complied with them at 30 June 2017 and was forecast to comply at 31 December 2017 and 30 June 2018, but that compliance with the leverage covenant depended on forecasts assuming the completion of a number of PPP disposals and settlement receipts on contracts; the board continued to adopt the going concern basis notwithstanding the net liability position in the interim balance sheet. According to the National Audit Office, on 17 November 2017 Carillion announced that it expected to breach the terms of its banking covenants at the end of 2017, and on 22 December 2017 its lenders agreed to delay the covenant test date to April 2018; the FRC's announcement of 12 May 2026 likewise records that in November 2017 Carillion indicated it would breach its banking covenants the following month. ^{1 5 4}

analysisOn 29 September 2017 Carillion announced that a term sheet for £140 million of additional committed facilities had been agreed with five of the group's core lenders, subject to documentation and conditions precedent; the facilities were to reduce to £100 million on 30 April 2018, when £40 million matured, and be repayable on 31 December 2018. The National Audit Office records the same announcement of £140 million of additional lending facilities, and FTI's draft review for the lenders describes the £140 million as emergency financing provided in September 2017. In its September 2017 interim announcement Carillion also stated that self-help measures would not alone achieve its target of moving towards average net debt of 1.0 to 1.5 times EBITDA by the end of 2018, and that the board was therefore considering other options, including raising equity to repair and strengthen the balance sheet in due course; it guided to full-year 2017 average net debt of between £825 million and £850 million. ^{1 2 3}

analysisFormer Group Finance Director Zafar Khan's letter of 21 February 2018 states that after an initial review of several UK construction contracts in May 2017, and as the performance of major contracts deteriorated, the board began considering with its advisers the feasibility of a rights issue to strengthen the balance sheet; that Zafar Khan worked closely with Carillion's brokers to plan for it; that, in Zafar Khan's recollection, the need for an enhanced contract review as part of the preparations was ultimately a collective board decision; and that KPMG were asked to assist with that review. This is Zafar Khan's recollection as a party to the inquiry. Andrew Dougal, audit committee chair, gave a consistent account in a letter of 5 April 2018: management, the board and the audit committee decided on an internal forward-looking analysis of the key contracts, principally involving Emma Mercer, which would also be required for any potential equity raising then starting to be considered in May 2017; the board asked KPMG to perform certain audit procedures on it, the audit committee asking for some year-end procedures to be accelerated, and the combined reviews became the 'Enhanced Contract Review'. The committees describe it as an enhanced management review of key contracts in May 2017 audited by KPMG, and TPR's report describes the July 2017 profit warning as following a review of Carillion's material contracts by its auditors, KPMG LLP; the conduct and status of that review belong to the account of Carillion's accounting and audit. Andrew Dougal's letter states that the review recommended a provision of £695 million, which management increased to £845 million. No equity was raised: according to the committees, Morgan Stanley told the board in July 2017 that it would not underwrite a proposal to raise further equity, and the board failed to attract the large injection of capital required from investors. ^{4 5 6 7}

analysisIn the committees' account, based on board minutes and Morgan Stanley's evidence, Morgan Stanley's July 2017 refusal to underwrite a proposal to raise further equity followed its conclusion that Carillion's senior management could neither produce nor deliver an investment proposition that would convince shareholders and new investors to support a potential rights issue. After Morgan Stanley's representatives left the meeting, the Carillion board concluded that the broker's position was 'not credible' and that, while it would continue to work with Morgan Stanley as broker in the short term, that would change. Morgan Stanley confirmed that HSBC were appointed joint corporate broker on 14 July 2017 and that Carillion thereafter sought its advice less frequently. Philip Green had told the committees that Carillion sought quality advice, naming Slaughter and May as its lawyers, Lazard as its bankers and Morgan Stanley as its brokers; in a response published by the committees on 12 July 2018, Philip Green stated disagreement with many of the report's conclusions but would not comment while investigations were ongoing. ^{6 8}

analysisThe Companies House charges register for Carillion plc (company number 03782379) lists six charges, all outstanding and none satisfied or part satisfied. The earliest, charge code 0378 2379 0001, was created on 9 December 2016 and delivered on 16 December 2016, with Santander UK PLC, as security agent for the secured parties, as the person entitled; its brief description reads 'Contains fixed charge'. The other five name Glas Trust Corporation Limited as the person entitled: charges 0378 2379 0003, 0004 and 0005 were created on 24 October 2017 and delivered on 27 October 2017, 0006 was created on 24 October 2017 and delivered on 28 October 2017, and 0002 was created on 26 October 2017 and delivered on 27 October 2017, each described as containing a fixed charge. The Glas Trust charges were thus created after the 29 September 2017 announcement of the £140 million term sheet with five core lenders, and four of them on 24 October 2017, the day on which, according to the pension trustee, its contribution-deferral agreement, negotiated with Carillion and its lenders, was documented. That is an analysis of the coincidence of dates in the register, Carillion's interim announcement and the Trustee's letter: the register entries do not state which obligations the charges secure, no retained primary document states the secured obligations, and a link between the charges and the new facilities is therefore not established by the reviewed records. ^{9 1 10}

analysisAccording to the National Audit Office, on 23 October 2017 Carillion's major lending banks (the Coordinating Committee) commissioned consultants to carry out an independent business review of Carillion's restructuring business plan; the lenders commissioned FTI to produce that review, and Carillion presented its plan first to the major lenders and their advisers FTI and then to the Cabinet Office. Carillion's Group Business Plan of January 2018 states that the group had written about £1.1 billion off its balance sheet and that net debt had increased by about £850 million in 2017 because of legacy contracts, delays in settlements and PFI transactions; that year-end 2017 spot net debt was higher than expected at £1,100 million, while average net debt was in line with expectations at £886 million (in September 2017 Carillion had guided to £825 million to £850 million); that the group was materially over-leveraged and unable to generate enough EBITDA to fund the completion of legacy contracts and future financing, debt and pension obligations; and that it therefore needed to restructure its balance sheet and raise new finance. It expected net liabilities of £500–600 million at 31 December 2017 and 2018. ^{1 2 3 4}

analysisThe plan's RF4 forecast for 2017 gave total revenue of £4,739 million and operating profit of £155 million, and it planned 2018 revenue of £3,958 million (£3,537 million rebased, excluding £217 million from legacy contracts and £204 million from disposals that do not recur) with operating profit of £131 million. It cited an order book of £12.9 billion, a pipeline of £28.8 billion and revenue visibility of 75 per cent for 2018 (48 per cent for 2019), and stated that adopting IFRS 15 from 1 January 2018 would reduce reserves by £118 million with no cash impact. It put the funding requirement at a peak of about £360 million in September 2018 and about £350 million in September 2019, assuming intra-month peaking of about £100 million, headroom of about £75 million and continued use of the early payment facility at about £320 million during 2018, with dividend policy not yet determined. The plan was prepared on a 'business as usual' basis for bank financing, bonding, the early payment facility and leasing, and its cash flows were presented unlevered, with no pension contributions. According to FTI's draft review, the plan was presented to lenders on 10 January 2018, and the group's own view of its funding requirement was £360 million, most of it needed by May 2018, plus up to £309 million of bonding and letters of credit. ^{3 5}

analysisIn the executive summary of its draft 'Project Ray' independent business review for Carillion's lenders, published by the committees, FTI Consulting stated that the group had been poorly managed for a considerable period, with significant underperformance and contract issues masked by aggressive accounting and working capital management, and that historical year-end and half-year reporting of net debt had been aggressively managed through short-term deferral of payments, acceleration of receipts and short-term loans from joint ventures. FTI put Plc borrowings in the region of £1.5 billion from banks and debt investors, including £140 million of emergency financing in September 2017, plus a further £250–300 million of off-balance-sheet 'core debt' through the early payment facility, which extended supplier payment terms from about 30 to about 120 days; it noted significant advance payments received on construction and ICT (Wipro) supplier contracts, and that the group had signalled a need for full equitisation of Plc debt and about £360 million of additional financing. These are FTI's views in a draft which, according to the National Audit Office, remained subject to agreement with Carillion's management and was not shown to the lenders or the Cabinet Office; the cover date of the retained copy reads 15 January 2017, while the published file and the NAO's citation date it 15 January 2018. FTI recorded that management believed its sensitivities overstated the risks and were too harsh, and former directors told the NAO that they objected to the draft's analysis of their capacity to win future business and of achievable margins, which they believed was too pessimistic and overstated Carillion's capital needs. In October 2023 the Insolvency Service, accepting an eight-year disqualification undertaking from Richard Howson, stated that payments procured from Wipro in 2013 and 2014 and in 2016 had been wrongly reported and accounted for as profit, understating net debt by £41.0m in the 2013 financial statements and by £39.2m in the 2016 financial statements, and that Richard Howson ought to have known of the concealment from the auditors of the true picture regarding Carillion's obligation to make repayments to Wipro. ^{5 1 6}

analysisFTI's draft also estimated the technical provisions funding deficit of the group's defined benefit pension schemes at about £700 million and their section 75 liability at about £2.8 billion, and warned that, given the scale of the pension liabilities and the schemes' claims in an insolvency, further new money would be extremely high risk. It found that the business plan showed a funding requirement of about £240 million before disposals, sensitivities and financing costs, which the group assessed at £360 million after management sensitivities, and that FTI's own sensitivities raised the requirement to £495 million in August 2019 before future financing costs. These are FTI's estimates and views in a draft document. FTI recorded that management believed its sensitivities overstated the risks and were too harsh, and said that it considered them a balanced view rather than a worst case. ⁵

analysisThe 'Board of Directors and Advisers' pages of Carillion plc's 2014 and 2016 annual reports list KPMG LLP as auditor, National Westminster Bank plc as banker, Morgan Stanley and Stifel Nicolaus Europe Ltd as joint brokers, Lazard as financial adviser, Slaughter and May as legal adviser and Equiniti as share registrar; the 2014 report adds that Equiniti maintained the company's share register. FTI's draft review of January 2018 states that the group had by then retained Lazard to assist with the financial restructuring and EY to support the business plan, working capital, liquidity and cost reduction. The committees' May 2018 report lists Carillion's payments to advisers on Friday 12 January 2018, three days before the company was declared insolvent, totalling £6,396,141 and including £551,716 to Lazard & Co, £1,196,093 to Slaughter and May, £1,018,666 to FTI Consulting and £37,211 to Sacker & Partners. ^{1 2 3 4}