daily check

· GoP has reportedly finalized a PkR1.25tn borrowing agreement with commercial banks aiming to reduce the power circular debt burden.

· The freshly acquired debt will be allocated towards: i) refinancing of PkR683bn PHPL liabilities, ii) PkR280bn to nuclear plants, iii) PkR220bn to LNG based plans, and iv) PkR5bn to state-owned power plants.

· We anticipate authorities to amass annual savings of PkR220bn through this restructuring exercise.

Authorities moving to settle power circular debt: GoP has reportedly finalized a PkR1.25tn borrowing agreement with commercial banks at financing rate of ~10.8% (KIBOR – 1%) aiming to reduce the power circular debt burden, as per newsflows. The initiative is part of a broader three-part strategy to eliminate PkR2.4tn in outstanding liabilities through fresh borrowing, budgetary allocations, and the already renegotiated IPP contracts. The restructuring plan is expected to provide fiscal relief by replacing higher-cost PHPL loans/power-producer liabilities, which presently carry financing of KIBOR + 2% and 4%, with less costly financing through commercial banks.

Restructuring to yield PkR220bn in savings: The freshly acquired debt of PkR1.25tn from commercial banks will be allocated towards settling several obligations including: i) retirement of PkR683bn PHPL liabilities, ii) PkR280bn to nuclear plants, iii) PkR220bn to LNG based plans, and iv) PkR5bn to state-owned power plants. Notably, in-exchange for upfront payments of outstanding receivable balances, authorities expect waiver of PkR270bn in late-payment surcharges (LPS) by the respective IPPs. Furthermore, remaining ~PkR720bn payable to power producers is expected to be settled through a combination of: PkR463bn reduction in payables via renegotiated IPP contracts and PkR224bn waiver on payables to government-owned hydel plants. Finally, PkR250bn in payments will be executed through the earmarked circular debt subsidy allocations within the federal budget.

The aforementioned PkR1.25tn borrowed from commercial banks is set to be repaid over six years, with the existing PHPL surcharge on consumer bills to be replaced by debt-servicing charge of ~PkR3.3/kWh. Given the current interest rate differential of approximately 3-3.5% under the new debt servicing agreement (at KIBOR – 1%), the consumer surcharge will now cover both principal and interest repayments. Previously, this surcharge was only sufficient to meet interest payments, but the lower financing rate has created room for principal repayment within the same levy. Subsequently, we anticipate authorities to amass annual savings of PkR220bn through this restructuring exercise, with interest payable amounting to PkR136bn in the first year.

PSO and SNGP to be major beneficiaries: Overall, watering down of power circular debt on account of payments towards RLNG-based power plants, positions PSO and SNGP as a key beneficiary. A cumulative disbursement of PkR220bn is expected to be routed through three IPPs—Balloki, Haveli Bahadur Shah, and QATPL—which operated at load factors of 36%, 77%, and 66% in FY24, respectively. A portion of the principal repayment will comprise of EPP (energy purchase price) payments, ultimately flowing to PSO via SNGP. However, since PSO only records principal receivables while LPI remains off-book until realized, the state-owned OMC is unlikely to see any immediate P&L impact from these transactions.

Investment Perspective: PSO stands as our top pick from the sector, with a Dec’25 target price of PkR729/sh on the stock, offering upside potential of 96% over the last close. In addition to this, the stock provides an FY25/26E dividend yield of 5%/8%.