Neelum-Jhelum Hydropower Project Losses Hit Rs. 128 Billion: Negative for Power Sector Stocks

What the Neelum-Jhelum Hydropower Project audit revealed

The Auditor General of Pakistan (AGP) has released a report detailing significant financial and operational failures at the Neelum-Jhelum Hydropower Project. During fiscal year 2024-25, the project reportedly suffered losses exceeding Rs. 128 billion. This includes net losses of Rs. 29.41 billion and business interruption losses amounting to Rs. 99.18 billion. These substantial losses are attributed to prolonged shutdowns following two tunnel collapses, one in 2022 and another in May 2024, for which inquiries remain incomplete.

The audit also highlighted management's failure to address technical defects, renew critical insurance coverage for assets worth Rs. 267 billion, or secure compensation for the structural failures. Furthermore, the project has consistently missed its annual electricity generation targets since commissioning. A major contributing factor to the financial deterioration is the absence of an approved reference tariff from the National Electric Power Regulatory Authority (NEPRA), which led to an estimated Rs. 77.35 billion regulatory revenue shortfall. The project's financial position is precarious, with current liabilities surpassing current assets by Rs. 307.89 billion as of June 30, 2025, largely due to debt repayment defaults.

Why it matters for power sector stocks

The massive losses and operational failures at a key hydropower project like Neelum-Jhelum have significant implications for Pakistan's power sector. Hydropower is generally a cheaper source of electricity compared to thermal generation. When a large hydro project is offline or underperforming, the system has to rely more on expensive thermal plants, which increases the overall cost of electricity generation. This added cost can either be passed on to consumers through higher power-tariffs or absorbed by the system, further inflating the already severe energy-circular-debt problem. The audit's findings of mounting debt, regulatory revenue shortfalls, and debt repayment defaults directly contribute to the worsening financial health of the sector, which is a persistent challenge for all power generation and distribution companies.

Which stocks, and why

The financial distress and operational issues at Neelum-Jhelum, particularly its contribution to the broader circular debt, are negative for listed power sector companies. These companies, especially Independent Power Producers (IPPs) and integrated utilities, are heavily exposed to the issue of circular debt, which affects their cash flows and profitability. When the overall financial health of the power sector deteriorates, it often leads to delays in payments to these companies.

• Hub Power: As the largest IPP, Hubco is significantly exposed to the power sector's circular debt. Worsening financial conditions and payment delays within the system negatively impact its receivables and cash flow. The project's losses add to the overall strain.
• Kot Addu Power: Another major thermal IPP, Kapco also faces substantial exposure to circular debt. The financial challenges highlighted by the Neelum-Jhelum audit reinforce concerns about timely payments from power purchasers.
• Nishat Power: This IPP, like others, operates on regulated returns but is vulnerable to the accumulation of circular debt. The systemic issues revealed by the audit suggest a continued difficult operating environment for IPPs.
• K-Electric: As a vertically integrated utility, K-Electric is affected by the overall financial stability of the power sector, including circular debt and tariff determinations. The Neelum-Jhelum project's issues contribute to the systemic financial strain that impacts K-Electric's ability to recover costs and manage its own receivables.

What to watch

Investors should closely monitor government actions to address the growing circular debt in the power sector, as the Neelum-Jhelum losses are a significant addition to this problem. Any progress on the inquiries into the tunnel collapses and efforts to restore the project's full operational capacity will be important. Furthermore, NEPRA's future tariff determinations for power generation and distribution companies will be crucial, as these will indicate how the increased costs from reduced hydropower generation and other systemic issues are managed within the sector.