What’s been the buzz of the financial circles for months has finally become a reality, with the much-discussed power circular debt resolution agreement signed yesterday, paving the way for a PKR 1.225trn loan from banks at KIBOR minus 0.9%. This is likely to lower costs by 1.5–5%, as the facility will replace higher-cost obligations, including IPPs’ penal income (3M KIBOR + 200–450 bps) and PHPL interest charges (KIBOR + 2%), which will be refinanced.

PSO is expected to be the main beneficiary

• PSO is expected to be the key beneficiary, as payments from CPPA-G to RLNG power plants (NPPMCL, QATPL, and Nandipur) will flow through SNGP and ultimately to PSO, though with some delay.
• We estimate an impact of ~PKR 100/share for PSO, on a conservative basis.
• The company is more likely to prioritize balance sheet improvement, which should support long-term financial flexibility over immediate payouts.

Government steps to strengthen PSO’s liquidity position

• Since Dec’23, PSO has recovered PKR 75bn in receivables from SNGPL and PKR 14.8bn from HUBC, further enhancing its liquidity.
• The excess liquidity generated has been utilized to reduce FE-25 borrowings, which declined by PKR 89bn over the same period, standing at PKR 356bn as of Jun’25.
• Supported by debt repayments and lower interest rates, PSO’s finance costs declined to PKR 34bn in FY25 from PKR 52bn in FY24.
• Moreover, recovery of power sector receivables under circular debt is expected to further strengthen PSO’s liquidity and reduce finance costs, we view.

 Other Beneficiaries

• The government also plans to settle outstanding dues of coal power plants, which is expected to benefit HUBC, LUCK, ENGRO, FFC and THALL in the listed space.
• HUBC’s overdue trade debts for CPHGC, TEL, and TNPTL total PKR 53bn, PKR 12bn, and PKR11bn as of Jun’25 (~PKR 28/share stake-adjusted).
• LEPCL’s trade debts stand at PKR 19bn (PKR 13/share) as of FY25.
• EPTL receivables stand at PKR 50bn as of CY24 (~PKR 21/share stake-adjusted)
• However, for LUCK and ENGRO, we have applied a 20% discount on trade debts to reflect the LPS waiver, though clarity is still awaited on whether CPEC IPPs have agreed to the same.
• For HUBC, no discount has been applied as we have taken overdue receivables.
• FFC and THALL are also other minor beneficiaries for the resolution of circular debt.

 How the circular debt will be financed

• Annual payments will be financed through Debt Service Surcharge (DSS) revenues, currently set at PKR 3.23/KWh under the PHPL surcharge, with excess collections allocated to cover the loan’s principal over six years.
• Through the FY26 budget, the government legislated the removal of the 10% DSS cap, mitigating risks from potential rate spikes.
• These targets are set to gradually decline to zero by FY31.
• The remaining ~PKR 436bn of circular debt is expected to be financed through the power sector subsidy of ~PKR 1trn.

Clarity awaited on CPEC IPP’s LPS waiver

• While a breakthrough has been achieved in resolution of the power circular debt, clarity is still awaited on the LPS waiver for CPEC IPPs. As per media reports, disbursements will follow a one-month assessment, after which the government will have three months to draw and fully utilize funds. However, it can be sooner than expected.

Courtesy – AHL Research