PSO emerges as top winner in Rs1.2tr circular debt resolution

 September 24, 2025 (MLN): Pakistan State Oil Company Limited (PSO) is positioned to be the primary beneficiary of Pakistan's landmark Rs1.225 trillion power circular debt resolution agreement signed yesterday. 

It is estimated that PSO could see an impact of approximately Rs100 per share on a conservative basis, marking one of the most significant financial breakthroughs for the oil marketing giant in recent years, according to the latest report by Arif Habib Limited. 

The historic agreement involves a massive loan from banks at KIBOR minus 0.9%, which is expected to reduce power costs by 1.5-5% by replacing higher-cost obligations with more affordable financing.

For PSO, this translates into a major liquidity boost as payments from the Central Power Purchasing Agency-Guaranteed (CPPA-G) to Re-gasified Liquefied Natural Gas (RLNG) power plants will flow through Sui Northern Gas Pipelines Limited (SNGPL) and ultimately reach PSO, though with some delay.

The oil marketing company stands to recover substantial amounts from multiple power generation entities.

PSO's receivables from the power circular debt resolution are estimated at over Rs63bn based on June 2024 financials, the report further noted. 

PSO's Expected Receivables

Power Plant/Entity
Jun-24 (PKR mn)
Jun-23 (PKR mn)
NPPMCL
38,913
46,881
QATPL
4,929
17,562
Arbitration amount (likely payable to SNGPL)
10,879
12,820
GENCO-III – Nandipur (partial)
25,204
28,191
Total Payable per power company financials
79,925
105,454
Likely receivable by PSO
63,857
81,739
Per Share Impact (PKR)
136.0
174.11

The company is expected to prioritize balance sheet improvement over immediate dividend payouts, which analysts believe will support long-term financial flexibility.

PSO's Financial Position

Even before this circular debt resolution, PSO has been systematically improving its liquidity position. Since December 2023, the company has recovered Rs75bn in receivables from SNGPL and an additional Rs14.8bn from Hub Power Company (HUBC).

This enhanced liquidity has enabled PSO to reduce its FE-25 borrowings by a substantial Rs89bn over the same period, bringing the total down to Rs356bn as of June 2025.

The impact of these recoveries is already visible in PSO's financial performance.

The company's finance costs declined significantly to Rs34bn in FY25 from Rs52bn in FY24, supported by debt repayments and lower interest rates.

The recovery of power sector receivables under the circular debt resolution is expected to further strengthen PSO's liquidity position and reduce finance costs even more substantially.

This agreement represents one of the largest financial interventions in Pakistan's power sector history.

The financing structure is designed for sustainability, with annual payments covered by Debt Service Surcharge (DSS) revenues currently set at PKR 3.23 per kilowatt-hour.

The government has also legislated the removal of the 10% DSS cap through the FY26 budget, mitigating risks from potential rate spikes.

Principal repayment will be spread over six years using excess DSS collections, with targets set to gradually decline to zero by FY31.

While PSO emerges as the primary beneficiary, the circular debt resolution extends significant benefits to several other listed companies.

The government's plan to settle outstanding dues of coal power plants is expected to provide substantial relief across the power sector value chain.

Other Major Beneficiaries

Company
Receivables FY25 (PKR bn)
Stake Adjusted (PKR bn)
Per Share Impact (PKR)
HUBC
76.00
35.76
27.57
CPHGC
53.00
24.38
18.80
TEL
12.00
7.20
5.55
TNPTL
11.00
4.18
3.22
LUCK (LEPCL)
15.51
15.51
10.59
ENGRO (EPTL)
40.44
20.22
16.79
FFC (TEL)
12.00
3.60
2.53
THALL (TNPTL)
11.00
2.86
35.30

Hub Power Company (HUBC) stands to benefit significantly with overdue trade debts totaling Rs76bn for its various power generation entities.

The company's receivables from CPHGC, TEL, and TNPTL amount to Rs53bn, Rs12bn, and Rs11bn respectively as of June 2025, translating to approximately Rs28 per share on a stake-adjusted basis.

Lucky Cement's power subsidiary LEPCL holds trade debts of Rs19bn, representing about Rs13 per share impact.

Engro Corporation's EPTL receivables stand at Rs50bn as of 2024, providing approximately Rs21 per share benefit on a stake-adjusted basis.

However, analysts have applied a 20% discount on trade debts for LUCK and ENGRO to reflect potential Late Payment Surcharge (LPS) waivers, though clarity is still awaited on whether China-Pakistan Economic Corridor (CPEC) Independent Power Producers have agreed to similar terms.

The circular debt resolution addresses a total outstanding amount of Rs1.661tr, with Rs1.225tr being resolved through the banking facility and the remaining Rs436bn to be financed through the power sector subsidy allocation.

Breakdown of Power Circular Debt Resolution

Component
Amount (PKR bn)
Existing Power Circular Debt Stock
1,661
Payables to power producers
908
GENCOs' payable to fuel suppliers
93
Amount Parked in PHL
660
Remaining Stock to be Resolved
1,225
Repaying all PHPL loans
660
Remaining interest-bearing arrears
565
Amount from power budget subsidy
436

The resolution will replace higher-cost obligations including Independent Power Producers' penal income charges ranging from 3-month KIBOR plus 200-450 basis points, and Power Holding Private Limited (PHPL) interest charges at KIBOR plus 2%.

This refinancing is expected to generate substantial cost savings across the power sector.

Government's Substantial Subsidy Commitment

The government has allocated over Rs1tr in power sector subsidies for FY26, demonstrating its commitment to resolving the circular debt crisis and stabilizing the energy sector.

Power Sector Subsidies (Rs in million)

Subsidy Category
FY26 Budgeted
FY25 Revised
FY25 Budgeted
Tariff differential to Agri Tube Wells (Balochistan)
4,000
9,500
9,500
Inter-DISCO Tariff Differential
249,136
276,000
276,000
Merged Districts KP (ex-FATA)
40,000
65,000
65,000
Tariff Differential to AJK
74,000
108,000
108,000
Pakistan Energy Revolving Fund (PERA)
48,000
48,000
48,000
K-Electric Tariff Differential
125,000
174,000
174,000
Payment to IPPs
95,000
115,000
-
Lump Provision for Power Subsidy
400,000
394,000
509,000
Total Power Sector Subsidies
1,036,136
1,190,000
1,204,000

The largest component is the lump provision for power subsidy at Rs400bn, followed by inter-DISCO tariff differential subsidies at Rs249bn.

K-Electric receives Rs125bn in tariff differential subsidies, while Azad Jammu and Kashmir gets Rs74bn for similar purposes.

While the main circular debt agreement represents a major breakthrough, some issues remain unresolved.

Clarity is still awaited on the Late Payment Surcharge (LPS) waiver for CPEC Independent Power Producers, which could provide additional benefits to companies like LUCK and ENGRO if implemented as expected.

The successful implementation of this circular debt resolution could serve as a template for addressing similar structural issues in other sectors of Pakistan's economy. 

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