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.
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.