PJSC Ukrnafta has summed up the results of its cooperation with PJSC Dniproazot in 2015-2018. The analysis was prepared at the request of the Internal Audit Commission that is looking into the operational and financial aspects of cooperation between two companies.
Between 2015 to 1Q2018, Ukrnafta sold to Dniproazot 1 625 ktons of ammonia worth UAH 9.5 bln (w/o VAT). Ukrnafta made a gross profit of UAH 3.5 bln. The profitability of ammonia production was strongly positive at 50% in 2015, 34% in 2016, 19% in 2017 and 47% in 1Q2018. The fluctuations in profitability were driven by changes in ammonia prices on the global markets to which the price of ammonia for Dniproazot was pegged. In 2H2017, the profitability was also negatively impacted by stoppages at several gas-producing fields after the regulator blocked the extension of a number of licenses which was later found unlawful by the relevant court decisions.
Ukrnafta’s cooperation with Dniproazot dates back to July 2010 when the parties signed the contract for Ukrnafta to lease ammonia production capacities, as well as the contract for the sale of ammonia produced by Ukrnafta to Dniproazot on the territory of the enterprise. In July 2015, a range of amendments was introduced to the contract on the sale of ammonia. Firstly, the contract was extended until the end of 2017. Secondly, the price of ammonia was linked to the FOB export price at Pivdenny (Odesa) based on Ferticon’s quotations and further adjusted to the ExW basis. Thirdly, the amendments allowed Dniproazot to file claims in case of the unilateral termination of the contract by Ukrnafta and imposed the requirement to give a one-year notice in case of refusal to extend the contract.
At the end of 2016, Ukrnafta informed Dniproazot about refusal to extend the contract, and in late 2017 the contract expired. The parties concluded an addendum to the contract in late 2017 to enable the parties to return the production units from the lease and transfer personnel without disruption of operations, as well as allowed Dniproazot the time to receive licenses and permits to produce ammonia in 1Q2018. At the same time, Ukrnafta insisted on the revision of the pricing formula for ammonia which additionally improved the profitability of the ammonia business. Ukrnafta completed processing gas into ammonia in late March 2018 and as of April has been selling gas to its clients on the Ukrainian market under the stock market and bilateral contracts.
Ukrnafta passed on all of the information concerning cooperation in production and sale of ammonia to the Internal Audit Commission. The company is also actively cooperating with a group of KPMG auditors starting September 2018, which were also contracted to examine the business processes and controls in ammonia production.