For 2019/20, the group recognised a deferred tax charge of £158 million, compared with £34 million for 2018/19. Of the deferred tax charge for 2019/20, £136 million relates to the government's reversal of the planned reduction in the rate of corporation tax from 19 per cent to 17 per cent from 1 April 2020. Excluding the deferred tax adjustment for the change in tax rate of £136 million in the current year, the total effective tax rate was around 20 per cent for the current year and around 17 per cent for the prior year. Subject to any legislative or tax practice changes, we would expect the total effective tax rate to be in line with the headline rate of corporation tax for the medium-term. In 2019/20, there are £157 million of tax adjustments taken to equity, primarily relating to remeasurement movements on the group's defined benefit pension schemes – including the adjustment arising from a change in the rate at which the deferred tax liabilities are measured, from 17 per cent to 35 per cent, being the rate applicable to refunds from a trust.

Profit after tax

Underlying profit after tax of £430 million was £22 million higher than last year, principally reflecting the £32 million increase in underlying profit before tax.

For 2019/20 we have changed the approach we use to derive underlying profit after tax to exclude the impact of deferred tax. This approach is in line with the regulatory model whereby cash tax is recovered through revenues, with future revenues allowing for cash tax including the unwinding of any deferred tax balance as it becomes current. By making this adjustment, the group's underlying tax charge does not include tax that will be recovered through revenues in future periods, thus reducing the impact of timing differences. This approach is consistent with the approach taken by our listed peers and with what we believe to be the direction of travel of the International Accounting Standards Board's (IASB) rate-regulated activities project. Our prior year numbers have been restated for comparability.

Reported profit after tax decreased by £257 million to £107 million, principally reflecting the £133 million decrease in the reported profit before tax and a £124 million increase in the reported deferred tax charge largely resulting from the Government's reversal of the planned reduction in the rate of corporation tax from 19 per cent to 17 per cent from 1 April 2020.

Earnings per share

Underlying earnings per share increased from 59.8 pence to 63.0 pence. This underlying measure is derived from underlying profit after tax. As noted above, we have changed the approach we use to derive underlying profit after tax to exclude the impact of deferred tax, with our prior year numbers restated for comparability.

Basic earnings per share decreased from 53.3 pence to 15.7 pence for the same reasons that caused the decrease in profit after tax.

Dividend per share

Reflecting performance in the year and across AMP6 more generally, the board has proposed a final dividend of 28.40 pence per ordinary share in respect of the year ended 31 March 2020. Taken together with the interim dividend of 14.20 pence per ordinary share, paid in February, this results in a total dividend per ordinary share for 2019/20 of 42.60 pence. This is an increase of 3.2 per cent, compared with the dividend relating to last year, in line with the group's AMP6 dividend policy of targeting a growth rate of at least RPI inflation each year through to 2020. The inflationary increase of 3.2 per cent is based on the RPI element included within the allowed regulated revenue increase for the 2019/20 financial year (i.e. the movement in RPI between November 2017 and November 2018).

The final dividend is expected to be paid on 3 August 2020 to shareholders on the register at the close of business on 26 June 2020. The ex-dividend date is 25 June 2020.

The AMP7 dividend policy announced in January 2020 targets a growth rate of CPIH inflation each year through to 2025, with further details set out below. It is, however, too early to predict the full impact of COVID-19 on inflation, the economy more generally and on our business, and we will review our dividend policy for AMP7 as a clearer picture of the post COVID-19 economic environment emerges.

Policy period –the dividend policy aligns with the five-year regulatory period which runs from 1 April 2020 to 31 March 2025.

Policy approval process – the dividend policy was considered and approved by the United Utilities Group board in January 2020, as part of a comprehensive review of the 2020–25 regulatory final determination in the context of a detailed business planning process, with due regard for the group's financial metrics, credit ratings and long-term financial stability, and is reviewed at least annually.

Distributable reserves – as at 31 March 2020, the company had distributable reserves of £3,105 million. The total external dividends relating to the 2019/20 financial year amounted to £291 million. The company distributable reserves support over ten times this annual dividend.

Financing headroom – supporting the group's cash flow, we adopt a funding/liquidity headroom policy of having available resources to cover the next 15–24 months of projected cash outflows on a rolling basis.

Cash flows from subsidiaries – the basis for UUG dividend distributions in AMP7 comprises expected returns from UUW based on AMP7 performance, including the base dividend return of 4 per cent (nominal) on the equity portion of the shadow RCV, together with accumulated outperformance in prior periods that has been retained by the group after sharing with customers. The UUW board has determined that there should be no dividend payments made by UUW during the financial year 2020/21 and that any eventual dividend that may ultimately be earned relating to the 2020/21 financial year will be deferred into the future when prevailing uncertainties have been resolved and the financial position has become more clear. This does not impact the UUG board's decision in relation to the payment of dividends for 2020/21 and the UUG board will continue to monitor UUW's AMP7 performance in order to support the external payment of dividends to shareholders.

Financial stability – the water industry has invested significant capital since privatisation in 1989 to improve services for customers and provide environmental benefits, a large part of which is driven by legislation. Water companies have typically raised borrowings to help fund the capital investment programme. Part of total expenditure is additive to the regulatory capital value, or RCV, on which water companies earn a regulated level of return. RCV gearing is useful in assessing a company's financial stability in the UK water industry and is one of the key credit metrics that the credit rating agencies focus on. We have had a relatively stable RCV gearing level over the last ten years, always within our target range of 55 to 65 per cent, supporting a stable A3 credit rating for UUW with Moody's. RCV gearing at 31 March 2020 was 62 per cent and the movement in net debt is outlined in the cash flow section below. Given the level of uncertainty associated with the economic impact of COVID-19, and specifically the future outlook for inflation, it is probable that our RCV gearing will increase above its current level and we will therefore continue to monitor the position as greater clarity emerges.

Annual dividend approval process – the group places significant emphasis on strong corporate governance, and before declaring interim and proposing final dividends the UUG board undertakes a comprehensive assessment of the group's key financial metrics.

Policy sustainability – at the time of approving the policy in January 2020, the board was satisfied that on average across AMP7 as a whole the projected dividend would be covered by underlying profit after tax and that the policy would be sufficient to withstand reasonable changes in assumptions, such as inflation, opex, capex and interest rates. Extreme economic, regulatory, political or operational events, which could lead to a significant deterioration in the group's financial metrics during the policy period, may present risks to policy sustainability. In particular, the longer-term economic impacts resulting from COVID-19 could impact the group's financial metrics, and these could include sustained levels of high unemployment, corporate failures and lower inflation affecting revenues, financing costs and RCV.

Cash flow

Net cash generated from continuing operating activities for the year ended 31 March 2019 was £810 million, and therefore broadly consistent with £832 million in the previous year. The group's net capital expenditure was £645 million, principally in the regulated water and wastewater investment programmes. This excludes infrastructure renewals expenditure which is treated as an operating cost under IFRS. Cash flow capex differs from regulatory capex, since regulatory capex includes infrastructure renewals expenditure and is based on capital work done in the period, rather than actual cash spent.

Net debt including derivatives at 31 March 2020 was £7,361 million, compared with £7,067 million at 31 March 2019. This increase largely reflects regulatory capital expenditure, payments of dividends, interest and tax, the inflationary uplift on index-linked debt, fair value movements and the impact of IFRS16 resulting in a non-cash increase in lease liabilities, partly offset by operating cash flows and a repayment of loans owed from joint ventures.

Fair value of debt

The group's gross borrowings at 31 March 2020 had a carrying value of £8,363 million. The fair value of these borrowings was £8,834 million. This £471 million difference principally reflects the significant fall in real interest rates compared with the rates at the time we raised a portion of the group's index-linked debt. This difference has decreased from £1,089 million at 31 March 2019 due primarily to an increase in credit spreads.

Debt financing and interest rate management

Gearing, measured as group net debt divided by UUW's shadow (adjusted for actual spend) regulatory capital value, was 62 per cent at 31 March 2020. This is slightly higher than the 61 per cent as at 31 March 2019 and remains within our target range of 55 to 65 per cent.

UUW's senior unsecured debt obligations are rated A3 with Moody's Investors Service (Moody's), A- with Fitch Ratings (Fitch) and BBB+ with Standard & Poor's Ratings Services (S&P) and all on stable outlook. United Utilities PLC's (UU PLC) senior unsecured debt obligations are rated Baa1 with Moody's, A- with Fitch and BBB- with S&P, all on stable outlook.

The group has access to the international debt capital markets through its €7 billion euro medium-term note (EMTN) programme. The EMTN programme does not represent a funding commitment, with funding dependent on the successful issue of the notes.

Cash and short-term deposits at 31 March 2020 amounted to £528 million. Over 2015–20, we had a financing requirement totalling around £2.5 billion. This was fully funded before the end of the AMP with subsequent finance raised prefunding our AMP7 requirement. In total over 2020–25, we expect to raise around £2.1 billion to cover refinancing and incremental debt, supporting our five-year investment programme.

We remain one of the sector leaders in the issuance of CPI-linked debt having previously achieved CPI-linkage on £465 million of our debt portfolio, in response to Ofwat's decision to transition away from RPI inflation linkage. In November 2019, we increased the CPI-linkage in our debt portfolio by a further £50 million (to £515 million) by increasing the amount outstanding on UUW's financing subsidiary, United Utilities Water Finance PLC's (UUWF) £250 million public bond with a maturity date in July 2033, by an additional £50 million and simultaneously swapping to CPI.

In February 2020, UUWF raised £250 million 1.75 per cent fixed rate notes in the public bond market with an 18-year maturity.

Since September 2019, the group has extended a £50 million committed bank facility by one year out to 2024, and £100 million of facilities by one year out to 2025. In addition, since March 2020, the group has renewed £50 million of committed bank facilities for a five-year term, and extended a £100 million facility for approximately a further three years to April 2026.

Long-term borrowings are structured or hedged to match assets and earnings, which are largely in sterling, indexed to UK price inflation and subject to regulatory price reviews every five years.

Long-term sterling inflation index-linked debt provides a natural hedge to assets and earnings. At 31 March 2020, approximately 48 per cent of the group's net debt was in RPI-linked form, representing around 30 per cent of UUW's regulatory capital value, with an average real interest rate of 1.4 per cent. A further 7 per cent of the group's net debt was in CPI-linked from, representing around 4 per cent of UUW's RCV, with an average real rate of 0.2 per cent. The long-term nature of this funding provides a good match to the company's long-life infrastructure assets and is a key contributor to the group's average term debt maturity profile, which is around 18 years.

Our inflation hedging policy is to target around 50 per cent of net debt to be maintained in index-linked form. This reflects a balanced assessment across a range of factors.

Where nominal debt is raised in a currency other than sterling and/or with a fixed interest rate, the debt is generally swapped to create a floating rate sterling liability for the term of the debt. To manage exposure to medium-term interest rates, the group fixes underlying interest costs on nominal debt out to ten years on a reducing balance basis.

Historically, this has been supplemented by fixing substantially all remaining floating rate exposure across a forthcoming regulatory period around the time of the price control determination. Recognising Ofwat's intention to apply debt indexation for new debt raised during the 2020–25 regulatory period, we have retained the hedge to fix underlying interest costs on nominal debt out to ten years on a reducing balance basis, but have not supplemented this with the additional 'top up' fixing at the start of the new regulatory period.

Liquidity

Short-term liquidity requirements are met from the group's normal operating cash flow and its short-term bank deposits and supported by committed but undrawn credit facilities. The group's €7 billion EMTN programme provides further support.

At 31 March 2020, the group had around £1.2 billion of available liquidity, comprising cash and short-term deposits (enhanced by new finance raised in the period), plus committed undrawn revolving credit facilities. Of this, £722 million covers short-term debt and debt maturities which fall due across the next 12 months. After taking this into account, the group has headroom of £436 million, providing flexibility in terms of when and how further debt finance is raised to help refinance maturing debt and support the delivery of our regulatory capital investment programme. The group plans to raise between £500 million and £800 million of term funding in 2020/21 and the group has recently re-established a Euro Commercial Paper Programme, which would facilitate access to the Bank of England's Covid Corporate Financing Facility (CCFF), should the group need to do so. The Bank of England has confirmed our eligibility to participate in the CCFF. Whilst we do not expect to use this facility, we see it as prudent contingency planning to have it available to the group.

We consider that we operate a prudent approach to managing banking counterparty risk. Counterparty risk, in relation to both cash deposits and derivatives, is controlled through the use of counterparty credit limits. Our cash is held in the form of short-term money market deposits with prime commercial banks.

We operate a bilateral rather than a syndicated approach to our core relationship banking facilities. This approach spreads maturities more evenly over a longer time period, thereby reducing refinancing risk and providing the benefit of several renewal points rather than a large single refinancing requirement.

Pensions

As at 31 March 2020, the group had an IAS 19 net pension surplus of £754 million, compared with a net pension surplus of £484 million at 31 March 2019. This £270 million increase is as a result of the acceleration of £103 million deficit repair contributions to the group's defined benefit schemes made in April 2019, and a spike in credit spreads at 31 March 2020 due to COVID-19 that resulted in a temporary decrease in the valuation of liabilities. The scheme specific funding basis does not suffer volatility due to credit spread movements to the same extent as it uses a prudent, fixed credit spread assumption and is hedged for inflation and interest rates. Any inflation and credit spread movements are therefore not expected to have a material impact on the pension liabilities calculated on a scheme specific funding basis.

Further detail on pensions is provided in note 19 (Retirement benefit surplus) of our consolidated financial statements.

Guide to Alternative Performance Measures (APMs)

The underlying profit measures in the following table represent alternative performance measures (APMs) as defined by the European Securities and Markets Authority (ESMA). These measures are linked to the group's financial performance as reported under International Financial Reporting Standards (IFRSs) as adopted by the European Union in the group's consolidated income statement, which can be found in the Consolidated income statement. As such, they represent non-GAAP measures.

These APMs have been presented in order to provide a more representative view of business performance. The group determines adjusted items in the calculation of its underlying measures against a framework which considers significance by reference to profit before tax, in addition to other qualitative factors such as whether the item is deemed to be within the normal course of business, its assessed frequency of reoccurrence and its volatility which is either outside the control of management and/or not representative of current year performance.