Directors’ Report on the operations of Zakłady Chemiczne Police S.A. and the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018

Grupa Azoty Zakłady Chemiczne Police Group Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

This Directors’ Report presents key developments that occurred in the 12 months ended December 31st 2018 at the Grupa Azoty Zakłady Chemiczne Police Group and Grupa Azoty Zakłady Chemiczne Police S.A., the Group’s parent, including results of their operations, as well as a description of relevant risks and threats. It also presents financial and non-financial indicators, if material for the assessment of the Group’s and the parent’s condition, as well as additional explanations on the amounts presented in the consolidated and separate financial statements.

Grupa Azoty Zakłady Chemiczne Police Group Page 2of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Contents 1. General information about the Group ...... 5 1.1. Organisation and structure ...... 5 1.2. Changes in the organisational structure ...... 8 1.3. Company organisational and equity ties ...... 8 2. Management of the Group ...... 9 2.1. Parent’s organisational chart ...... 9 2.2. Changes in key management policies ...... 9 2.3. The Group’s workforce ...... 10 3. Business overview...... 11 3.1. Key information...... 11 3.2. Overview of key products ...... 13 3.3. Sales markets and supply sources ...... 15 3.4. Significant agreements ...... 16 3.5. Significant events ...... 16 4. Growth strategy and policy ...... 17 4.1. Strategy ...... 17 4.2. Directions of development ...... 17 4.3. Growth prospects and market strategy ...... 18 4.4. Key investments in and abroad ...... 19 4.5. Key equity investments ...... 22 4.6. Feasibility of investment plans ...... 22 4.7. Significant R&D achievements ...... 22 5. Financial condition of the Group ...... 23 5.1. Assessment of factors and one-off events with a material impact on operations and financial performance ...... 23 5.2. Market overview ...... 25 5.3. Key financial and economic data ...... 30 5.3.1. Segments’ financial results ...... 32 5.3.2. Operating expenses ...... 34 5.3.3. Structure of assets, equity and liabilities ...... 35 5.3.4. Financial ratios ...... 38 5.4. Management of capital and assets ...... 40 5.5. Bank deposits ...... 40 5.6. Borrowings ...... 40 5.7. Loans advanced ...... 43 5.8. Sureties and guarantees received and issued ...... 43 5.9. Material off-balance-sheet items ...... 47 5.10. Financial instruments ...... 47 5.11. Expected financial condition ...... 48 6. Risk, threats and growth prospects ...... 48 6.1. Significant risk factors and threats ...... 48 6.1.1. Investment project management ...... 48 6.1.2. Laws, regulations and compliance ...... 49 6.1.3. Management of fixed production assets ...... 50 6.1.4. Technical safety ...... 51 6.1.5. Comprehensive customer support...... 52 6.2. Grupa Azoty Group’s significant external and internal growth factors ...... 54 6.2.1. External factors ...... 54 6.2.2. Internal factors ...... 55 7. Equity and other securities and its major shareholders ...... 56 7.1. Total number and par value of Company shares, holdings of Company shares by supervisory and management personnel, and interests of such persons in the Company’s related entities ...... 56 7.2. Treasury shares held by the Parent, Group companies and persons acting on their behalf ...... 56 7.3. Shares of the Parent ...... 56 8. Statement of compliance with corporate governance standards ...... 58 8.1. Corporate governance code applicable to the Parent and the place where the text of the code is available to the public ...... 58 8.2. Declaration of applying the recommendations contained in the ‘Best Practice for WSE Listed Companies 2016’ ...... 59

Grupa Azoty Zakłady Chemiczne Police Group Page 3 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

8.3. Internal control and risk management systems ...... 63 8.4. Management standards and systems ...... 64 8.5. Shareholding structure ...... 65 8.6. Special control powers of holders of securities ...... 66 8.7. Restrictions on voting rights ...... 66 8.8. Restrictions on the transferability of securities ...... 66 8.9. Rules governing appointment and removal of the management staff. Powers of the management staff, including in particular the authority to resolve to issue or buy back shares ...... 66 8.10. Rules governing amendments to the Parent’s Articles of Association ...... 67 8.11. Operation of the General Meeting ...... 67 8.12. Composition and operation of the Company’s management and supervisory bodies...... 69 8.13. Diversity policy ...... 72 8.14. Remuneration policy ...... 73 8.15. Agreements between the Parent and Management Board members ...... 76 8.16. Sponsorship, charitable or similar activities ...... 76 8.17. Entertainment, legal, marketing, public relations, social communication and management consultancy expenditures ...... 78 8.18. Audit Committee ...... 79 9. Other material information and events ...... 81 9.1. Qualified auditor ...... 81 9.2. Environmental performance ...... 82 9.3. Awards and distinctions ...... 85 10. Other information ...... 85

Grupa Azoty Zakłady Chemiczne Police Group Page 4 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

1. General information about the Group 1.1. Organisation and structure As at December 31st 2018, the Grupa Azoty Zakłady Chemiczne Police Group (the “Grupa Azoty POLICE Group”, the “Group”) comprised Grupa Azoty Zakłady Chemiczne Police S.A. (the “Parent”, the “Company”), and: • eight subsidiaries (in which Grupa Azoty Zakłady Chemiczne Police S.A. held ownership interests above 50%), including one company in liquidation, • two associates (in which the Parent held ownership interests below 50%), including one company in liquidation bankruptcy. Table 1.1 Parent’s equity interests in subordinated entities as at December 31st 2018

Registered Share % of shares held Entity office/address capital by the Parent

ul. Kuźnicka 1, Grupa Azoty Police Serwis Sp. z o.o. 9,618 100.00 72-010 Police, Poland ul. Kuźnicka 1, Koncept Sp. z o.o. 512 100.00 72-010 Police, Poland Supra Agrochemia ul. Monopolowa 6, 19,721 100.00 Sp. z o.o. 51-501 Wrocław, Poland Transtech Usługi Sprzętowe ul. Kuźnicka 1, 9,783 100.00 i Transportowe Sp. z o.o. 72-010 Police, Poland Grupa Azoty Route de Ngor Villa No. 12, 132,000 Africa S.A. w likwidacji (in 99.99 Dakar, thousand liquidation) Zarząd Morskiego Portu Police ul. Kuźnicka 1, 32,642 99.91 Sp. z o.o. 72-010 Police, Poland ul. Kuźnicka 1, PDH Polska S.A. 304,000 59.93 72-010 Police, Poland Infrapark Police S.A. ul. Kuźnicka 1, 14,986 54.43 w likwidacji (in liquidation) 72-010 Police, Poland budchem Sp. z o.o. ul. Moczyńskiego 8/10, 1,201 48.96 in liquidation bankruptcy 70-101 , Poland ul. Kuźnicka 6, Kemipol Sp. z o.o. 3,445 33.99 72-010 Police, Poland

Grupa Azoty Zakłady Chemiczne Police Group Page 5 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Figure 1. Structure of the Group as at December 31st 2018:

The Parent – Grupa Azoty Zakłady Chemiczne Police S.A. The Company has for decades been a leading European manufacturer of and one of the largest Polish chemical companies. The Company’s advantages include a titanium white unit of a type unique in Poland, the size of its , phosphoric acid and sulfuric acid production, and the strong position in the market for compound mineral fertilizers. Internationally, the Company is appreciated not only for its production and sales volumes, but also for contributing to the development of the chemical industry and global agriculture. The Company pays due regard to CSR matters, engaging in projects that support local communities and regional development. Liaising with local authorities, Grupa Azoty Zakłady Chemiczne Police S.A. supports vocational education, with a particular focus on professions useful to the Company. The Company has also established links with higher education institutions, sharing expertise with students majoring in chemistry, environmental protection, management and marketing. Upon graduation, some of them move on to become Company employees. Group subsidiaries: Grupa Azoty POLICE Serwis Sp. z o.o. The subsidiary was registered on March 15th 2002 under No. 0000099823 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company’s business includes overhauls and project execution in the mechanical and construction industries (construction of systems and apparatuses, including those made of plastics, maintenance services, workshop services, treatment of metals, and technical supervision services), project execution and technical and engineering services in the areas of automation and power engineering, repairs of control and instrumentation equipment and power generation plant and equipment, plant engineering in automatics and power generation, including plant engineering in process control and visualisation systems. Koncept Sp. z o.o. The subsidiary was registered on September 6th 2001 under No. 0000041533 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company’s business consists in the provision of design services for the construction, assembly, mechanical, electrical, automation and measurement, and technological industries (including preparation of expenditure and investment estimates). The company specialises in design work for the chemical industry (manufacture of

Grupa Azoty Zakłady Chemiczne Police Group Page 6 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) ammonia, , compound fertilizers, phosphoric and sulfuric acid, and titanium pigment), as well as printing and binding services. Supra Agrochemia Sp. z o.o. The subsidiary was registered in the Commercial Register on December 29th 2000 and later re- registered in the National Court Register under No. 00000138374 by the District Court for Wrocław- Fabryczna of Wrocław, 6th Commercial Division of the National Court Register. Its business comprises revitalising post-industrial sites owned by the company and preparing them for the purposes of redevelopment projects. Transtech Usługi Sprzętowe i Transportowe Sp. z o.o. The subsidiary was registered on April 2nd 2001 under No. 00003660 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company provides transport services, plant and equipment services, and workshop services (repair of battery-electric trucks, stackers, passenger cars, delivery vans, lorries, loaders, diggers, bulldozers and mobile cranes) as well as periodic inspection services. Grupa Azoty Africa S.A. w likwidacji (in liquidation) The company has been in liquidation since May 12th 2017. Zarząd Morskiego Portu Police Sp. z o.o. The subsidiary was registered on December 13th 2004 under No. 0000223709 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The Municipality of Police holds a minority interest in the company. The company’s business comprises sea port operation, port construction, property management, research work, sea and inland shipping, and coastal water transportation services. The subsidiary is a port authority within the meaning of the Act on Sea Ports and Harbours. PDH Polska S.A. The subsidiary was registered on September 24th 2015 under No. 0000577195 by the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register. The company’s purpose is to construct a PDH unit for propylene production with related infrastructure, auxiliary systems and inter-unit connections, and extension of the Police sea port facilities to include a handling terminal for chemicals that would provide the required logistics infrastructure for receiving and storing the raw material. Infrapark Police S.A. w likwidacji (in liquidation) The company has been in liquidation since April 30th 2012. Associates: Budchem Sp. z o.o. w upadłości likwidacyjnej (in liquidation bankruptcy) The company was registered in the Commercial Register on October 14th 1999 and later re-registered in the National Court Register under No. 0000135223 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The majority shareholder is WB Technika Sp. z o.o. The company is in liquidation bankruptcy and does not trade. Kemipol Sp. z o.o. The company was registered in the Commercial Register on December 18th 1990 and later re- registered in the National Court Register under No. 0000119127 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The majority shareholder is Kemira Kemi AB from Sweden. The remaining shares are held by the Company and Bank Ochrony Środowiska S.A. The company’s business consists in the manufacturing and sale of chemicals for water purification and wastewater treatment.

Grupa Azoty Zakłady Chemiczne Police Group Page 7 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

1.2. Changes in the organisational structure Re-transfer of shares in subsidiary African Investment Group S.A. The Parent lodged a claim against DGG Eco Sp. z o.o. for refund of undue tranches of the purchase price for a 55% interest in African Investment Group S.A. (“AFRIG S.A.”). The parties had signed a termination agreement providing for withdrawal from and reversal of the legal effects of the agreement of August 28th 2013 for purchase of the majority interest in AFRIG S.A. Performing the provisions of the termination agreement along with annexes thereto, on May 30th 2018 the Company and its subsidiary Grupa Azoty Police Serwis Sp. z o.o. transferred all the shares in AFRIG S.A. back to DGG Eco Sp. z o.o. As a result, on May 30th 2018 the Parent lost control of the subsidiary AFRIG S.A. and, indirectly, of AFRIG Trade SARL. In accordance with the terms of the termination agreement, DGG Eco Sp. z o.o. is to refund the amounts previously paid to it by the Parent towards the purchase price of the shares over a period of five years. For details, see Section 5.1 of this report.1 Share capital increase at PDH Polska S.A. On April 9th 2018, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered a share capital increase at PDH Polska S.A. Following the registration, the share capital of PDH Polska S.A. amounts to PLN 304,000 thousand2. In the increased share capital of PDH Polska S.A., the Company holds an interest of 59.93%. On August 31st 2018, the shareholders completed the share capital increase, in accordance with a resolution of the General Meeting of PDH Polska S.A. of November 10th 2017, having paid the last tranche towards the increased share capital. Winding up of subsidiary Infrapark Police S.A. w likwidacji (in liquidation) On November 1st 2018, INFRAPARK Police S.A. w likwidacji (in liquidation) finally discontinued its business operations. On January 8th 2019, the Annual General Meeting of INFRAPARK Police S.A. w likwidacji (in liquidation) approved the documents closing the company’s liquidation. As a next step, the changes will be registered in the National Court Register.

1.3. Company organisational and equity ties As at December 31st 2018 and December 31st 2017, the Parent’s shares in total voting rights at the General Meetings of its subsidiaries and associates were equal to its respective ownership interests in these companies.

1 The situation was disclosed by the Company in Current Report No. 33/2018 of August 7th 2018 – Effects of loss of control over subsidiary AFRIG in consolidated financial statements of Grupa Azoty Police for H1 2018. 2For details, see Current Report No. 12/2018 of April 10th 2018 – Court registration of share capital increase at subsidiary.

Grupa Azoty Zakłady Chemiczne Police Group Page 8 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

2. Management of the Group 2.1. Parent’s organisational chart Figure2. Parent’s organisational chart as at this report issue date

Management Board President of the Management Board, Chief Executive Officer

GR Technology GB Security GO Public GD Central GK Internal Audit Development Office Relations Office Dispatch Division Division Office

GZ Human GT Technical GC Strategic GF Finance GG Technical Resources and GH Fertilizer Safety Procurement Department Department Management Sales Department Department Department Department

GS Tendering GX Controlling GW Corporate Agro Department Department Sales Department

GN Fertilizers GA Nitro Business GP Pigments Business Unit Unit Business Unit

GL Logistics GI Infrastructure GJ Laboratory GE Power Centre Centre Centre Analysis Centre

Organisational changes at the Parent until this report issue date: On February 19th 2018, a Tendering Department was established, reporting directly to the President of the Management Board, CEO. On April 1st 2018, a Corporate Agro Sales Department was established, tasked with coordinating all processes related to sales of fertilizer segment products across the Grupa Azoty Group. By cooperating, the Group companies will be able to strengthen their relationships with customers. The Group will follow a uniform sales strategy and policy, consolidating and coordinating all marketing activities under its common brand. On July 20th 2018, a Controlling Department was established, reporting directly to the President of the Management Board, CEO. On January 1st 2019, a Technical Department was established, reporting directly to the President of the Management Board, CEO.

2.2. Changes in key management policies The most important changes in the management policies in the reporting period included: • adoption of new rules for disposal of property, plant and equipment (Resolution No. 4 of the Extraordinary General Meeting of May 18th 2018 to adopt new rules for disposal of the Company’s non-current assets), • adoption of a new text of the Rules of Procedure for the General Meeting (Resolution No. 6 of the Extraordinary General Meeting of May 18th 2018 on the Rules of Procedure for the General Meeting), • amendment of the Company’s Articles of Association (Resolution No. 21 of the Annual General Meeting of June 4th 2018 to amend the Company’s Articles of Association)3.

3 For details, see Current Report No. 35/2018 of September 4th 2018 – Registration of amendments to Articles of Association of Grupa Azoty Zakłady Chemiczne Police.

Grupa Azoty Zakłady Chemiczne Police Group Page 9 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

2.3. The Group’s workforce Table 2. Number of employees at the Grupa Azoty Zakłady Chemiczne Police Group As at As at Employee group Dec 31 2018 Dec 31 2017 Women Men Women Men Blue collar 266 2,157 257 2,143 White collar 396 695 376 668 Total 662 2,852 633 2,811

Table 3. Number of employees at the Parent As at As at Employee group Dec 31 2018 Dec 31 2017 Women Men Women Men Blue collar 264 1,547 254 1,526 White collar 289 453 287 452 Total 553 2,000 541 1,978

Table 4. Number of employees at consolidated subsidiaries* As at As at Employee group Dec 31 2018 Dec 31 2017 Women Men Women Men Blue collar 2 610 3 617 White collar 107 242 89 216 Total 109 852 92 833 * excluding the Parent

Table 5. Number of Group employees: annual average and at the end of 2018 Employee group Annual average At year end

Women Men Women Men Blue collar 263 2,164 266 2,157 White collar 388 676 396 695 Total 651 2,840 662 2,852

Table 6. Number of employees at the Parent: average for the year and as at the end of 2018 Employee group Annual average At year end

Women Men Women Men Blue collar 261 1,555 264 1,547 White collar 291 452 289 453 Total 552 2,007 553 2,000

Table 7. Number of employees at consolidated subsidiaries: annual average and at the end of 2017* Employee group Annual average At year end

Women Men Women Men Blue collar 2 608 2 610 White collar 97 224 107 242 Total 99 832 109 852

* excluding the Parent

Grupa Azoty Zakłady Chemiczne Police Group Page 10 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Table 8. Employee turnover at the Group from January 1st to December 31st 2018 2018 Women Men New hires 67 260 Departures -36 -202 Total 31 58

Table 9. Employee turnover at the Parent from January 1st to December 31st 2018 2018 Women Men New hires 40 138 Departures -28 -116 Total 12 22

Table 10. Structure of the Group’s workforce by education University Total Item Year or Secondary Vocational Primary workforce equivalent Number of employees 2018 3,514 1,060 1,395 856 203 Number of employees 2017 3,444 980 1,373 874 217

Table 11. Structure of the Parent’s workforce by education University Total Item Year or Secondary Vocational Primary workforce equivalent Number of employees 2018 2,553 780 1,074 564 135 Number of employees 2017 2,519 743 1,063 556 157

Table 12. Structure of the Group’s workforce by length of service Above 20 Item Year up to 5 years 6−10 years 11−20 years years 622 315 779 1,798 Number of employees 2018 18% 9% 22% 51% 534 333 708 1,869 Number of employees 2017 15% 10% 21% 54%

Table 13. Structure of the Parent’s workforce by length of service Above 20 Item Year up to 5 years 6−10 years 11−20 years years 341 241 578 1,393 Number of employees 2018 13% 9% 23% 55% 338 252 549 1,380 Number of employees 2017 13% 10% 22% 55%

3. Business overview 3.1. Key information The Group’s performance remains strongly correlated with the Parent’s market environment. This correlation has been present since the Company commenced its operations. The Company is a leading manufacturer of chemicals in the region and a significant one on the EU market. The Parent’s operations comprise two main business segments – Fertilizers and Pigments, as well as other activities. Another business segment identified within the Group is Polymers, covering the subsidiary PDH Polska S.A., which is responsible for the ‘Polimery Police’ project involving the construction of a propylene and polypropylene production unit along with auxiliary infrastructure.

Grupa Azoty Zakłady Chemiczne Police Group Page 11 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Currently, the Parent’s operations are conducted through three business units and four support centres, including: • Fertilizers Business Unit, • Nitro Business Unit, • Pigments Business Unit, • Power Centre, • Logistics Centre, • Infrastructure Centre, • Laboratory Analysis Centre. Fertilizers Business Unit The Fertilizers Business Unit is the largest organisational unit within the Company in terms of revenue and production volumes. The output includes compound NP, NPK and NS fertilizers, as well as phosphoric and sulfuric acids. The Parent is the largest manufacturer of these compound fertilizers and acids in Poland and one of the largest in Europe. Products of the Fertilizers Business Unit are sold in Poland and on foreign markets (including Europe and South America, as well as Africa and Asia). Key products of the Fertilizers Business Unit are POLIFOSKA® and POLIDAP®, which are well recognised fertilizer brands in Poland. The POLIFOSKA® brand has become a generic name for compound fertilizers in Poland, recognised for its superior quality and functional properties. The POLIFOSKA brand has a high concentration of pure constituents, chemical uniformity of fertilizer grains and high assimilability of constituents. Nitro Business Unit The Nitro Business Unit is one of Poland’s leading manufacturers of ammonia and urea. The products are marketed both on the domestic and export markets. Urea is sold for agricultural and technological applications. An important business line within the unit is the manufacture and sale of urea solutions: NOXy® (AdBlue®), a 32.5% urea solution, and Pulnox®, a 40% urea solution. NOXy® (AdBlue®) is used in the automotive industry to reduce oxide emissions from diesel engines. A steady rise in the consumption of NOXy® is expected in Europe in the coming years given the increasingly stringent regulations aimed at reducing atmospheric emissions of exhaust fumes. Pulnox® is also used as a reducing agent in vehicle emissions control technologies. It is widely used in large power units, which generate harmful substances in the processes of burning fossil fuels, including nitrogen and sulphur oxides. Thanks to Pulnox®, power and heat producers can meet stringent EU standards on industrial emissions. The range of products offered by the Nitro Business Unit is supplemented by ammonia water (Likam®). These products are manufactured at production plants which are constantly modernised and upgraded, with an emphasis on occupational safety and environmental protection. Pigments Business Unit The principal activity of the Pigments Business Unit is the manufacture and sale of titanium white and associated semi-products: iron sulfate and hydrolytic acid. Being the leader in the domestic market of titanium white, the Unit also operates a well-developed export network. Titanium dioxide-based pigments, marketed under the TYTANPOL® brand, are manufactured using state-of-the-art technology which meets stringent environmental requirements. Thanks to their versatility, efficiency, durability, safety in use and non-toxic nature, they are widely used, lending excellent aesthetic and protective properties to pigmented products. Titanium white is used, among others, in the production of paints and varnishes, printing inks, plastics, as well as papers and laminates. The consistently high product quality and professional advice on product use have been recognised − the Unit has received many awards and honours such as EUROPRODUKT 2004, MEDAL EUROPEJSKI 2004 (European Medal), the Highest Quality Certificate (2007) and the Teraz Polska Badge of Quality (2012). Power Centre The Power Centre produces heat (in the form of hot steam), electricity and feedwater, distributes energy and compressed air, and purchases electricity and heat (steam) for the Company’s needs. It operates state-of-the-art generating units, ensuring reliable supplies of heat, electricity and feedwater. The Centre also sells electricity, steam and heating water as well as fly ash to external customers. Logistics Centre The Logistics Centre is responsible for shipping, transport, packaging and distribution of feedstock, raw materials and the Company’s products, and the operation and maintenance of port infrastructure. In the transport processes, it is important to ensure continuity of supplies, product dispatch handling,

Grupa Azoty Zakłady Chemiczne Police Group Page 12 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) transport organisation and services, and operation of ports owned by the Company. There are two port facilities (a sea port and a barge port), which have bulk cargo transshipment wharves and transshipment stations to handle ammonia and sulfuric acid. The product dispatch process involves efficient fertilizer storage, packaging and distribution. The logistics system handles over 3m tonnes of bulk cargo annually (ca. 1.5m tonnes of feedstock and raw materials and ca. 1.5m tonnes of products). Infrastructure Centre The Infrastructure Centre is responsible for managing technical infrastructure, production and distribution of cooling and demineralised water, wastewater treatment, and waste landfilling. It is a support centre established for comprehensive management of land and building properties owned by the Company. The Centre carries out inspections required under applicable laws and standards, and manages repairs and maintenance of the production assets. It is also responsible for procurement and storage of technical materials. The Centre’s operations are environmentally friendly, as evidenced by the presence of rare species of flora and fauna in areas adjacent to the Company’s wastewater treatment plant and the phosphogypsum landfill unit. Laboratory Analysis Centre The Laboratory Analysis Centre satisfies all needs of internal customers regarding chemical analyses of feedstock supplies, implementation of technological processes, evaluation of the quality of finished goods and semi-finished products, environmental protection, OHS, and implementation of new technical and technological solutions. The Centre also provides similar laboratory services to the Company’s external customers. It operates in accordance with the Integrated Management System based on PN-EN ISO 9001 and PN-EN ISO 14001, PN-EN ISO 18001 and PN-EN ISO/IEC 17025:2017.

3.2. Overview of key products The Parent’s principal business is the manufacture of fertilizers and nitrogen compounds (PKD 20.15.Z) and the manufacture of dyes and pigments (PKD 20.12.Z). Its non-core activities comprise the manufacture of other inorganic basic chemicals (PKD 20.13.Z). Under its Company’s Articles of Association, the Company may also conduct other activities necessary to ensure proper operation of its business, including procurement of raw materials, as well as distribution and marketing of products. The Company’s main commercial products include: • compound fertilizers – NP4 (MAP, DAP) and NPK5 mineral fertilizers manufactured using mono- and bi-ammonium phosphate and salt, with secondary additives (sulfur, magnesium) and microelements, • NS fertilizer – nitrogen-based fertilizer with sulfur and magnesium, a granulated mixture of ammonia sulfate, urea and magnesite, • nitrogen fertilizer – urea, • liquid ammonia, • 32.5% urea solution for automotive applications – NOXy® (AdBlue®), • 35-45% urea solution for flue gas treatment in large power units – PULNOx® , • titanium white – a group of titanium dioxide-based white pigments. The Parent produces high volumes of sulfuric and phosphoric acid to obtain semi-finished products for the manufacture of its key commercial products. Using its semi-finished products, by-products and waste products as inputs, the Company also manufactures: • hexafluorosilicic acid, • dried iron (II) sulfate.

Whenever this report refers to quantities of compound fertilizer production, sales, product ranges within the mix etc., it should be noted that this category also includes the NS fertilizer (besides NP and NPK fertilizers).

4 NP fertilizers – compound fertilizers with two primary : nitrogen (N) and (P). NPK fertilizers – compound fertilizers with three primary nutrients: nitrogen (N) , phosphorus (P) and potassium (K).5

Grupa Azoty Zakłady Chemiczne Police Group Page 13 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

2018 production Table 14. Production volumes of the Parent’s key products [tonnes] 2017 2018 production Product production % change volume volume Compound fertilizers 1,047,292 1,157,600 -9.53% Urea 387,931 399,089 -2.80% Ammonia 412,961 557,039 -25.87% Titanium white 34,833 38,566 -9.68% NOXy® (AdBlue®) 179,230 145,579 23.12% Sulfuric acid 689,350 750,650 -8.17% Phosphoric acid 326,418 374,931 -12.94%

2018 sales Table 15. Consolidated revenue by product Revenue Revenue Product % change 2018 2017 Compound fertilizers 1,390,198 1,458,570 -4.69% Urea 338,362 363,660 -6.96% Ammonia 112,774 241,735 -53.35% Titanium white 371,983 370,139 0.50% Other 208,030 165,474 25.72% Total 2,421,347 2,599,577 -6.86%

In 2018, revenue from sale of compound fertilizers and urea reached PLN 1,728,560 thousand, accounting for 71% of total revenue.

Figure 3.Revenue by main product groups and other sales 3% 6% 5% Compound fertilizers 14% Titanium white Urea

57% Ammonia NOXy® (AdBlue®)

15% Other

Revenue from sale of compound fertilizers in 2018 was PLN 1,390,198 thousand, having decreased 4.69% year on year, primarily due to lower sales volumes, only partly offset by higher selling prices. Revenue from sale of urea amounted to PLN 338,362 thousand, the lower figure having been attributable, among other things, to the transfer of some of urea volumes to the urea solutions segment, where strong sales growth was recorded. Given a temporarily unfavourable ratio of the ammonia market prices to production cost (due to high prices of natural gas), ammonia sales volumes were reduced (mainly export sales), with revenue in 2018 eventually reaching PLN 112,774 thousand. Revenue from sale of titanium white was slightly higher than in 2017, driven up by higher product prices.

Grupa Azoty Zakłady Chemiczne Police Group Page 14 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

3.3. Sales markets and supply sources In the reporting period, the Group’s revenue from sales on the Polish market was PLN 1,672,246 thousand. Relative to 2017, the share of domestic sales in total revenue rose by 7 pp, with the share of exports at 31%. Domestic and export sales accounted for 72% and 28% of total fertilizer sales, respectively. The key export markets were , the United Kingdom, the Czech Republic, Spain, Hungary, Ukraine, Italy and the Netherlands. Combined sales to those countries accounted for 78% of total export sales. Sales of titanium white on the domestic market accounted for 37% of total sales of the product, with exports making up the remaining 63%. The key export markets were Germany, Italy, France, Denmark, Sweden, Ivory Coast and Belgium. Combined sales to those countries accounted for 87% of total export sales. 65% of chemicals manufactured by the Group were placed on the domestic market, and 35% of them were exported. The key export markets were Germany, the Czech Republic, the Netherlands, Slovakia, Denmark, Sweden and France. Combined sales to those countries accounted for 93% of total export sales. Figure 4.The Group’s sales by geographies (by revenue)* 100,0%

90,0%

European Union 80,0% 27.7% Other North America 70,0% Other Other 0.1% Europe 60,0% Europe: 1.2% 50,0% South America Africa 40,0% European 0.6% Union South 30,0% America Poland 20,0% 1.2% Poland 10,0% 69.1% 0,0% 2018 2017

*EU member states, excluding Poland

No customer/trading partner of the Company accounted for more than 10% of the Parent’s revenue in 2018. In the case of suppliers, only PGNiG S.A., a gas fuel supplier, exceeded the 10% threshold (20.7%). Sources of strategic raw materials Phosphate rock Phosphate rock is a raw material used for the production of phosphoric acid, which in turn is an intermediate for phosphate fertilizers, including two-nutrient NP and multi-nutrient NPK fertilizers. The world’s largest phosphorite producer is China, which practically uses up all the volumes extracted domestically without exporting the material. The largest exporter of phosphate rock is Morocco. Phosphate rock is purchased by Grupa Azoty Police under term contracts or on the spot market, largely from Africa, mainly the continent’s northern region. Conditions on the phosphorite market are largely correlated with those in the fertilizer sector. Natural gas Natural gas was supplied by PGNiG S.A. under long-term contracts. Among its other applications, natural gas is the primary feedstock used to produce ammonia. Key suppliers of potassium chloride (KCl) include its producers based in countries of the former Soviet Union (Russia, Belarus), having abundant resources of the mineral and offering competitive commercial terms. The Company’s procurement strategy relies mainly on framework agreements,

Grupa Azoty Zakłady Chemiczne Police Group Page 15 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) with supplementary volumes sourced from Western Europe as and when needed. Potassium chloride is procured on a centralised basis at the Grupa Azoty Group level, with purchases made jointly for Grupa Azoty Police S.A. and GZNF Fosfory Sp. z o.o. Sulfur The sulfur procurement strategy is based on optimised intragroup supplies (from Grupa Azoty SIARKOPOL) with parallel supplies of petrochemical sulfur. This approach gives us considerable flexibility, while significantly reducing the risk of supply shortages. A centralised sulfur procurement strategy (joint purchases for the entire Grupa Azoty Group enabling aggregation of supply volumes) brings down the cost to purchase this raw material. Ilmenite and titanium slag Ilmenite and titanium slag are key feedstocks for the production of titanium white. In its production processes, the Company uses mainly Norwegian ilmenite and titanium slag originating from Canada.

3.4. Significant agreements Table 16. Agreements material to the Parent’s business Date and Agreement Parties Subject matter number of Value date current report Feb 06 2018 Master agreement for Grupa Azoty S.A. Feb 06 2018 Current Report 113,000* ammonia supply No. 3/2018 Mar 12 2018 Polska Grupa Górnicza S.A. Purchase of coal Mar 12 2018 Current Report 78 500* No. 5/2018 Apr 09 2018 Office Chérifien des Purchase of Apr 09 2018 Current Report 350,000 Phosphates phosphorites No. 11/2018 * The agreement was made for an indefinite period; its estimated value has been given on a per year basis. Significant agreements made after the end of FY 2018: On January 24th 2019, the Company’s Management Board signed a potassium chloride purchase contract with JSC Belarusian Potash Company of Minsk, Belarus. The contract was concluded for a definite term from January 1st 2019 to June 30th 2019. The value of the deliveries to be made under the contract is estimated at approximately PLN 130,000 thousand.6 On February 5th 2019, the Company entered into a trilateral contract with Ameropa AG of Binningen, Switzerland and Somiva SA of Dakar-Yoff, Senegal for purchase of low-cadmium phosphate rock sourced from Senegal. The contract was concluded for a definite term from February 1st 2019 to February 28th 2021. The value of the deliveries to be made under the contract is estimated at approximately PLN 240,000 thousand.7

3.5. Significant events Dividend On June 4th 2018, the Company Annual General Meeting passed a resolution to distribute dividend for 2017. The amount allocated to dividend payments was PLN 39,750 thousand, translating into dividend

6 For details, see Current Report No. 2/2019 of January 24th 2019 – Execution of contract with JSC Belarusian Potash Company. 7 For details, see Current Report No. 3/2019 of February 5th 2019 – Execution of contract for purchase of phosphate rock.

Grupa Azoty Zakłady Chemiczne Police Group Page 16 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) per share of PLN 0.53. The dividend was payable in respect of all Company shares (75,000,000). The dividend record date was set for July 10th 2018, and the dividend was paid on July 24th 20188. On April 25th 2018, the Annual General Meeting of KEMIPOL Sp. z o.o. passed a resolution to distribute dividend from the profit generated in 2017 – the Company received PLN 13,103 thousand. The dividend was paid on July 4th 2018. Other material events with a bearing on the Grupa Azoty Zakłady Azotowe Police Group’s performance and growth are described elsewhere in this report.

4. Growth strategy and policy 4.1. Strategy The Company is pursuing the development and value growth vision defined in the Grupa Azoty Group’s updated Strategy until 2020. The Grupa Azoty Group’s mission is to create value for the Group and the national economy by delivering safe, useful and innovation-driven chemical products. The Company is planning to implement advanced, comprehensive chemical industry solutions, meeting the expectations of our stakeholders. The Company will drive the development of Poland’s chemical industry and related sectors, providing a base for the domestic chemical product chain (in particular by supplying propylene, polypropylene and their derivatives for further processing), and will lead the R&D and innovation efforts in the chemical and related sectors. Thanks to its innovation mechanisms, the Company will position itself in high-margin, fine/speciality chemicals markets.

4.2. Directions of development The Grupa Azoty Group updated its Strategy until 2020, having developed a more detailed plan for its implementation (the Strategy Operationalisation project). Throughout the period covered by the Strategy, the Company will pursue growth in four key areas of challenge: • strengthening its position among the leading providers of solutions for agriculture on the European market, • developing its non-fertilizer business, • generating and implementing innovations to drive advances in the chemical industry. The Company’s business operations encompass two segments: Fertilizers and Pigments. In 2018, the Company was engaged in the following initiatives to support organic growth of the Fertilizers Segment: • Upgrade of the phosphoric acid unit was continued, followed by its pre-commissioning and adjustment run. The objective of the project is to enhance production efficiency through improved P2O5 recovery, lower process steam consumption in the acid concentration process, reduce generation of waste phosphogypsum, and bring down the cadmium content in the acid to improve its quality. • Upgrade of heat exchangers in the ammonia synthesis unit was continued. • A fertilizer drying facility was replaced by a new one, and replacement of a second such facility was commenced. • Work started to upgrade the absorption tower on the largest line of the sulfuric acid unit. • Work began to construct a PULNOx technical-grade urea solution production, storage and loading facility. • Work started to expand the heat exchange unit of the CCW closed-loop cooling system serving the ammonia and urea production units. • Computerisation of the I&C and electrical systems of the NPF Department of the PF-4 crude acid unit was completed. • Upgrade of the absorption system at the urea plant was completed. In 2018, the Pigments Segment continued initiatives aligned with the directions set out in the Grupa Azoty Group’s updated Strategy until 2020 to eliminate bottlenecks, improve production efficiency and enter new applications markets. Commissioning work was carried out as part of a project to upgrade the post-calcination gas distribution system.

8 For details, see Current Report No. 26/2018 of June 4th 2018 – Payment of dividend for 2017.

Grupa Azoty Zakłady Chemiczne Police Group Page 17 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Construction of a flue gas treatment unit and upgrade of the EC II CHP plant were completed in the power generation area supporting the business. The objective of the project was to bring the operation of the CHP plant in line with the requirements of Directive 2010/75/EU. Moreover, upgrade of the TUP-12 (TG1) turbine generator set and auxiliary equipment was completed. Operational excellence In 2018, work was continued to enhance operational efficiency so as to deliver cost savings and productivity improvements. As part of its innovation strategy, the Company and the other key companies of the Grupa Azoty Group were working to implement a programme that would foster innovative and improvement seeking attitudes.

4.3. Growth prospects and market strategy The Group pursues its growth strategy by leveraging new business opportunities and strengthening capabilities of key relevance to its competitive position. The most important value growth initiatives will continue to include optimisation of operating costs and resources, in particular by improving energy and process efficiency, introducing new solutions and technologies to bring down costs and increasing capacity utilisation, while ensuring compliance with environmental and technical safety requirements. In addition, the Company will strive to reduce the consumption of strategic feedstocks and process utilities as well as streamline inventory management. The Group focuses on effective implementation of its investment projects, improved efficiency of support processes, development of technologies and innovations (new and modified products in the fertilizers and titanium white segments, strengthening ties with science and customers), investment in human capital (to increase the pool of experience and competence, and to leverage and manage existing expertise), as well as financing optimisation. In its growth-oriented efforts, the Group seeks to support the delivery of its product and market strategy and focuses on meeting customer requirements and delivering value added with each product. Therefore, in its research and development activities the Parent focuses on improving and expanding its product range and manufacturing capabilities, as well as addressing environmental aspects. The Company’s key development projects cover production processes, manufacturing technologies, application technologies and efficient use of feedstocks and products. Having regard to the need to protect the natural environment and ensure occupational safety, the Company is engaged in development and upgrade projects designed to mitigate nuisance caused by its principal manufacturing operations. Pigments With respect to the Pigments segment, the strategy’s objective is to secure stable product sales during economic down cycles. The Company will entrench its leading position on the Polish market and retain key customers on target markets across Europe. The Grupa Azoty Group’s strategy for the Pigments segment is to maintain a broad product portfolio, improve efficiency of existing units by implementing upgrades and removing bottlenecks, and extend the value chain to include polymer additives. Fertilizer market With regard to the Fertilizers segment, the Group’s strategy will continue to focus on enhancing the efficiency of manufacturing processes, extending the value chain to include speciality products and expanding its range of services dedicated to agriculture. In order to secure a market outlet for its agro-products, the Group will continue to take steps to increase control over domestic and foreign fertilizer sales channels. To improve the Group’s relations with its key customers, steps will be taken to further the consolidation of fertilizer sales. The Company will continue adding new liquid and speciality fertilizers to its mix, as well as other products and services for the agricultural sector. This strategy, designed to reinforce the Company’s position on the European fertilizer market, requires continued efforts to improve cost-efficiency of the Company’s fertilizer business. To that end, process lines are being upgraded mainly to reduce their energy-intensity and operating costs, and to ensure their uninterrupted availability. Ammonia and urea market In 2019, the Company will continue to invest in improving the efficiency and reliability of the ammonia and urea units. Leveraging the opportunities opening up in its business environment with dynamic growth of the market for products reducing harmful emissions (including NOx), mainly in the industrial

Grupa Azoty Zakłady Chemiczne Police Group Page 18 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) sector, coupled with the growing market for reduction of automotive exhaust gas emissions, the Company began to invest in enhancing the efficiency of PULNOx urea solution production. Power generation The CHP units will continue to be regularly upgraded to ensure compliance with the changing legal requirements, particularly the environmental regulations. Measures taken to secure the Company’s long-term access to heat and electricity will mainly depend on changes in the regulatory regime and market conditions. New business areas In line with the adopted strategy, since 2016 the Group has been pursuing the ‘Polimery Police’ project (previously designated as ‘PDH’ (‘Propane DeHydrogenation’)), as the key strategic initiative aimed at diversifying its product portfolio, expanding into new business areas, and mitigating business cycle risks in the Fertilizers Segment. The project will involve the construction in Police of a propane dehydrogenation unit for propylene and polypropylene production, with an annual capacity of 400 thousand tonnes. Polypropylene is a material with a wide range of applications, critical for development of the chemical industry in Poland and Central Europe. It will also include the construction of auxiliary infrastructure, mainly loading and handling equipment at the maritime propane and ethylene terminal at the seaport in Police.

4.4. Key investments in Poland and abroad In 2018, the Group’s expenditure on property, plant and equipment and intangible assets was PLN 202,589 thousand. The Parent’s expenditure on property, plant and equipment and intangible assets was PLN 165,111 thousand, including: • growth capex PLN 43,107 thousand; • mandatory capex PLN 26,415 thousand; • maintenance capex PLN 25,398 thousand; • purchase of finished goods PLN 15,949 thousand; • major overhaul work and other expenditure PLN 54,242 thousand. Figure 5 Structure of capital expenditure by type

26% 33% growth capex Mandatory capex Business maintenance capex Purchase of finished 16% goods 10% Major overhaul work, 15% other

The subsidiaries’ expenditure on property, plant and equipment and intangible assets totalled PLN 45,105 thousand (before consolidation adjustments), with growth capex accounting for the vast majority of the total. Capital expenditure of the subsidiary PDH Polska S.A. on property, plant and equipment and intangible assets was PLN 43,989 thousand.

THE GROUP’S KEY INVESTMENT PROJECT In 2018, work was under way on Polimery Police, the Group’s key investment project involving the construction of propylene and polypropylene units with auxiliary facilities and infrastructure, as well as a port terminal with feedstock storage facilities. Polimery Police is scheduled to break ground in late 2019 and early 2020, while its completion is expected in late 2022. The ‘Polimery Police’ project will be implemented in four key areas: • technical, • decisions and permits, • financing,

Grupa Azoty Zakłady Chemiczne Police Group Page 19 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

• procurement and marketing. Technical workstream In January 2018, PDH Polska S.A. and Grace Technologies, Inc. executed an agreement to purchase a licence for the polypropylene production technology and a contract for the supply of catalysts. Over the last decade, it has been the preferred technology for polypropylene production, its popularity following from a limited number of operations and processes involved, and the use of advanced catalysts ensuring excellent properties of the polypropylene types produced. The technology will allow the company to produce polypropylene of each of the following three types: • as a homopolymer, • as a random (statistical) copolymer, • and as an impact (block) copolymer, each in several dozen varieties, depending on the catalysts, donors, additives and process conditions. The physical and chemical properties of selected product varieties will allow the company to diversify its sales and sell the product to various industries. The company has thus reached another milestone having already secured all technology licences essential for the project: besides the one discussed above, it also holds a licence for the Oleflex catalytic dehydrogenation process, provided by UOP Limited. The technical work primarily included the preparation of engineering documentation, particularly front-end engineering designs (FEEDs) for the polypropylene unit and auxiliary facilities, as well as a conceptual design of the polypropylene logistics infrastructure. The documentation was delivered to potential bidders for the role of the project’s general contractor on a turn-key (EPC) basis. Next, the invitation of EPC proposals was revised. Meetings were also held with potential bidders. Finally, on November 14th 2018, firm bids for general contractor services were received. The next step will involve detailed evaluation of the submitted proposals. Financing workstream In parallel to the technical work, steps were being taken to raise financing for the project. On October 19th 2018, financing institutions received an information package including the following materials: • term sheet for debt financing (both senior and subordinated), • financial model, • information memorandum, • package of preliminary due diligence reports, and • process letter, preceded by a series of meetings with the financial institutions to present the company’s sales strategy and its market environment. On November 28th 2018, the information package for the financing institutions was supplemented with information on the EPC bidders and their bids for general contractor services. Procurement and marketing workstream A comprehensive sales strategy prepared for the company was favourably assessed by a market adviser to the financing institutions. Talks were also continued to agree on the initial terms of business with polypropylene distributors and processors based in Poland and abroad. Letters of intent and term sheets were signed, covering the units’ feedstock requirements more than several times. On the other hand, letters of intent were signed providing for the volumes of polypropylene sales in excess of the units’ production capacity. Decisions and permits As the project had been extended in Q4 2017 to include a polypropylene unit, work was completed to prepare a new, extended environmental impact report. The report was submitted to the Regional Directorate for Environmental Protection. As at the reporting date, the administrative procedure to obtain an environmental permit for the extended scope of ‘Polimery Police’ was still pending. Tree and bird surveys were completed both on the construction site and at the contractor’s temporary facilities. The required documents were prepared to obtain formal and legal permits for removal of existing infrastructure from the area designated for the ‘Polimery Police’ project. In addition, work is under way to prepare the construction site for handover to the general contractor.

PARENT’S KEY PROJECTS

Grupa Azoty Zakłady Chemiczne Police Group Page 20 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

In 2018, the Company launched 29 new projects with an aggregate budget of PLN 50,269 thousand and continued 51 projects commenced in previous years. The number of projects completed by the Company in 2018 was 26, the key ones being presented and described below. Flue gas treatment unit and upgrade of the EC II CHP plant The objective of the project was to bring the operation of the CHP plant in line with the requirements of Directive 2010/75/EU. The project was implemented in three stages: upgrade of the boilers, construction of a flue gas deNOx unit and construction of a flue gas desulfurisation unit. The entire scope of the project was completed. The units operate without any disruptions, meeting the required reduction levels for emitted pollutants (concentrations of SO2, NOx, and particulate matter). Project budget: PLN 290,885 thousand; expenditure incurred: PLN 252,005 thousand. Change of the DA-HF phosphoric acid production technology The key objective of the project is to improve the efficiency of phosphoric acid production and the acid’s quality by reducing impurities and waste generation. The new technology is based on a licence from Prayon Technologies S.A. The project was divided into two stages. The first stage covered work performed while the unit remained in operation, whereas the second stage – while the unit was shut down. Work scheduled for each stage was completed. The unit was pre-commissioned; currently, an adjustment run is being performed. Project budget: PLN 83,350 thousand; expected completion: June 2019. Upgrade of TUP-12 (TG1) turbine generator set and auxiliary equipment The objective of the project was to improve the reliability, safety, flexibility and quality of the turbine generator set control systems across the operating range. In early April 2018, the turbine generator set was commissioned. Project budget: PLN 16,000 thousand; expenditure incurred: PLN 15,198 thousand. Replacement of 17/18E601A and 17/18E601B heat exchangers When implemented, the project will improve the technical condition and enable the use of more efficient equipment, thus improving the operational stability of the ammonia unit. The E601 heat exchangers in the ammonia synthesis unit on Line B were installed, commissioned and put in operation. Heat exchangers for Line A were made and delivered. The exchangers are to be installed during the unit shutdown in 2019. Project budget: PLN 15,500 thousand; expenditure incurred: PLN 12,805 thousand. Replacement of the 311 X PN-2 fertilizer drying unit A new drying unit guarantees an uninterrupted fertilizer drying process. In January 2018, the complete pre-commissioning and commissioning of the drying unit were run. The project was completed; the drying unit was placed in service. Project budget: PLN 12,000 thousand; expenditure incurred: PLN 11,787 thousand. Computerisation of the I&C and electrical systems of the NPF Department of the PF-4 crude acid unit An advanced production process control system will be deployed to fully automate the technological processes. The upgrades will in particular enable precise dispensing of raw materials and media, with continuous tracking and analysis of trends in the production process. The project involving full automation of the technological processes has been completed and is currently being accounted for. Project budget: PLN 10,846 thousand; expenditure incurred: PLN 10,401 thousand.

Grupa Azoty Zakłady Chemiczne Police Group Page 21 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

4.5. Key equity investments On April 9th 2018, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered an increase of subsidiary PDH Polska S.A.’s share capital.9 Following the registration, the share capital of PDH Polska was increased from PLN 180m to PLN 304m (including paid-up share capital of PLN 304m). Currently, the total number of shares of all issues is 30,400,000 (previously: 18,000,000) with a par value of PLN 10 per share. The Company took up 3,000,000 new shares, with a par value of PLN 10 per share and total value of PLN 30m (at an issue price equal to their par value), in the increased share capital of PDH Polska. Grupa Azoty S.A. took up 9,400,000 new shares, with a par value of PLN 10 per share and total value of PLN 94m (at an issue price equal to their par value), in the increased share capital of PDH Polska. As a result, the Company came to hold 18,217,875 shares in PDH Polska S.A., representing 59.93% of its share capital. 12,182,125 shares (40.07% of the share capital) are held by Grupa Azoty S.A.

4.6. Feasibility of investment plans The Company is continuing investment projects commenced in previous years, but also plans to begin new ones. The Company has full capacity to finance such investment projects. Expenditure on property, plant and equipment under the 2019 Investment Plan will be financed, first of all, with the Company’s own resources, working capital and funds available under the Grupa Azoty Group’s New Financing Agreements, intended to finance the Grupa Azoty Group’s general corporate needs arising from its Strategy and Investment Programme. The available credit limits cover long-term capital expenditure, minimising the risk of the Company failing to carry out its investment plans. Environmental protection projects will be analysed for the potential for raising financing from non- bank sources on preferential terms, such as EU funds or national support programmes.

4.7. Significant R&D achievements The Company’s research and development work was largely a continuation or extension of work commenced in previous reporting periods. The R&D efforts primarily involved the development of new and existing technologies and improvement of products. In December 2018, the Parent received a positive recommendation from the National Centre for Research and Development for its project ‘Development of a technology for the production of a new type of liquid fertilizers based on phosphate-bearing materials of sedimentary origin’, entered in the ‘Fast Track’ competition 2/1.1.1/2018 for large enterprises and consortia under the Smart Growth Operational Programme. The project will be executed by a consortium of key Grupa Azoty Group companies: the Company and Grupa Azoty Zakłady Azotowe Puławy S.A., with the Company as the consortium leader. EU institutions are now working on a new fertilizer regulation, aimed at implementing the Circular Economy policy and introducing EU-wide harmonised rules. The Commission additionally expects the regulation to mitigate the adverse impacts of fertilizer use on the environment and human health, reducing their accumulation in soil and contamination of water and food. Given the ongoing work to change the regulatory limits of fertilizer contaminants, including cadmium, the Company has continued R&D efforts to improve the quality of its phosphoric acid. It should be stressed that, in parallel, Grupa Azoty has been actively involved in legislative work on the relevant regulations. Other major projects include studies focusing on the assessment of the effectiveness of modified fertilizer formulas and their impact on the development of selected crops and soil parameters. Particular attention was devoted to work on effective waste management. Research was continued into the possibility of phosphorus recovery from industrial wastewater, which is in line with the idea of sustainable use of phosphorus and the concept of a closed-loop economy (Circular Economy). The aim is to develop a technology for recovering phosphorus from phosphogypsum landfill leachate, in the form of compounds that can be recycled or be suitable for direct application as a fertilizer. In 2018, the Company was engaged in conceptual work to evaluate the options for entering new business areas or introducing new uses for by-product streams.

9 For details, see Current Report No. 12/2018 of April 10th 2018 – Court registration of share capital increase at subsidiary.

Grupa Azoty Zakłady Chemiczne Police Group Page 22 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Work on modifications to the urea production technology commenced in the previous reporting period was continued. To that end, urea solution purification trials were conducted in a pilot plant to achieve the product quality requirements. Further application testing was also carried out on modified types of titanium white. In these activities, the Parent was working closely with academic and research institutions. The Implementation Doctorates (Polish: Doktorat Wdrożeniowy) programme of the Ministry of Science and Higher Education was continued in cooperation with the West Pomeranian University of Technology, Szczecin, with the involvement of a group of Company employees.

5. Financial condition of the Group 5.1. Assessment of factors and one-off events with a material impact on operations and financial performance Consequences of the re-transfer of shares in subsidiary AFRIG S.A. and its derecognition from consolidated accounts The Parent lodged a claim against DGG Eco Sp. z o.o. for refund of undue tranches of the purchase price for a 55% interest in AFRIG S.A. The price tranches were not due as AFRIG had failed to produce phosphate rock volumes provided for in the agreement. On December 20th 2017, the parties signed a termination agreement (confirmed by court settlement) providing for withdrawal from and reversal of the legal effects of the agreement of August 28th 2013 for purchase of the majority interest in AFRIG S.A10. The consequences of the agreement (settlement) taking legal effect, involving mutual recovery of performances under the purchase agreement being terminated, were made conditional upon a refund of the first tranche of the price and creation of security for repayment of the balance by February 28th 2018. As DGG Eco Sp. z o.o. had failed to meet these conditions, the settlement was not consummated by the originally set date11. As a result of further negotiations, an annex to the agreement was signed on May 22nd/23rd 2018, amending the terms of its consummation and mutual recovery of performances12. In accordance with the annex, on May 30th 2018 the Parent confirmed that the shares in AFRIG S.A. had been transferred back to DGG Eco Sp. z o.o. Key terms and conditions of the termination agreement between the Parent and DGG Eco Sp. z o.o. are as follows: • DGG Eco Sp. z o.o. is to refund the amounts paid by the Parent towards the purchase price for the shares, i.e. the entire amount of USD 28,850 thousand, in instalments payable over five years, the first one due by December 31st 2018 and the last one – by December 31st 2023, • the Parent is to cancel its trade receivables from AFRIG S.A. in the total amount of EUR 11,090 thousand and USD 1,258 thousand (in aggregate, equivalent to PLN 51,942 thousand), • AFRIG S.A. remains liable towards the Parent for repayment and servicing of a line of credit assumed by the Parent as a co-borrower but drawn solely by AFRIG S.A. in the amount of EUR 20,079 thousand (equivalent to PLN 86,734 thousand). In order to secure the performance of the settlement, DGG Eco Sp. z o.o. submitted a declaration of voluntary submission to enforcement under Art. 777 of the Code of Civil Procedure regarding the obligation to refund the above amount. Nevertheless, in the Parent’s opinion, given especially the fact that AFRIG S.A. (whose future operations, according to DGG Eco Sp. z o.o., are to serve as the source of financing to satisfy the Company’s claims) has declared insolvency (and filed a petition in bankruptcy on March 29th 2018) and that tax enforcement proceedings have been instituted against it, as well as the fact that DGG Eco Sp. z o.o. failed to fulfil its original obligation to secure the refund of the price for the shares in AFRIG S.A. by a bank guarantee, the fair value of the amount due from DGG Eco Sp. z o.o. for the re-transfer of the shares in AFRIG S.A. was initially recognised at USD 3,000

10 For details, see Current Report No. 43/2017 of December 20th 2017 – Execution of conditional settlement agreement (termination agreement). 11 For further details, see Current Report No. 4/2018 of March 1st 2018 – Status of conditional settlement agreement (termination agreement). 12 For details, see Current Report No. 24/2018 of May 24th 2018 – Amendment to terms of finalisation of agreement with DGG Eco sp. z o.o.

Grupa Azoty Zakłady Chemiczne Police Group Page 23 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) thousand (equivalent to PLN 11,160 thousand). The estimate was substantiated by an actual inflow of funds in August 2018. The Parent still has a recourse claim against AFRIG S.A. with regard to the obligation to repay the equivalent of the facility drawn by the subsidiary (EUR 20,079 thousand plus service costs). In view of the insolvency of AFRIG S.A., the amount to be repaid was recognised at nil fair value on initial recognition in the consolidated statement of financial position. The terms of the facility servicing and repayment are additionally set out in a trilateral agreement between the Parent, AFRIG S.A. and DGG ECO Sp. z o.o. The cancellation of trade receivables from AFRIG S.A. with the debtor’s consent, which in the previous years constituted income due but not received by the Parent, reduced the income tax expense by PLN 8,211 thousand. In accordance with IFRS 10 Consolidated Financial Statements, the transfer of AFRIG S.A. shares back to DGG Eco Sp. o.o. on May 30th 2018 resulted in loss of control over the subsidiary. Consequently, as of May 30th 2018 AFRIG S.A.’s net assets of PLN 137,250 thousand, adjusted for cancelled receivables of the Parent (PLN 51,942 thousand), liabilities under the credit facility assumed by the Parent (PLN 86,734 thousand) and negative non-controlling interests (PLN 61,734 thousand), were derecognised from the Group’s consolidated statement of financial position, with the effect recognised in consolidated profit/(loss) for the period. Also taken into account in recognising the effect of AFRIG S.A.’s derecognition from consolidated financial statements was the fair value of receivables from DGG Eco Sp. z o.o for the re-transfer of AFRIG S.A. shares (PLN 11,160 thousand). The total effect of the derecognition of former subsidiary AFRIG S.A. on consolidated net profit/(loss) is presented below. Table 17. Effect of loss of control over the subsidiary AFRIG S.A. on the consolidated results. Item Effect Finance costs Effect of loss of control over subsidiary -52,205 Profit/(loss) before tax -52,205 Income tax 8,211 Net profit/(loss) -43,994

In December 2018, as part of further efforts to improve the likelihood of payment for the re- transferred shares in AFRIG S.A. and related to the credit facility drawn by AFRIG S.A. together with service costs, the Parent signed supplementary annex 4 to the agreement along with an assignment of claims. The main provisions of supplementary annex 4 include: • security assignment of claims against a third party, in an amount of PLN 3,930 thousand, to partly secure the Parent’s claims related to service costs of the credit facility drawn by AFRIG S.A., • change of the amount of refund instalments due for the re-transferred shares in AFRIG S.A. In addition, the Group charged PLN 979 thousand of interest on the credit facility drawn by AFRIG S.A. against its net profit/(loss).

Prices of CO2 emission allowances

The prices of CO2 emission allowances (EUA) were rising throughout 2018, from EUR 7.5 to EUR 25.5. The strong upward movement and prevailing market trends, that is the extent and rate of the price growth, exceeded all earlier forecasts. The fact that the carbon market is now regulated by the European Commission through administrative measures, including introduction of the Market Stability Reserve (MSR) as of 2019 (back-loading and redemption of surplus allowances), has made the market all the more unpredictable. The sharp price increases coupled with significant market volatility are an obstacle to optimal management of the risk related to the prices of CO2 emission allowances. The Company took measures to adjust to the changed situation and mitigate the negative financial impact of higher EUA prices, purchasing allowances during temporary market declines. However, the need to purchase some allowances necessary to balance the demand for 2018 at relatively high market prices pushed up the variable costs of production.

In mid-December 2018, the Company had a sufficient number of allowances to cover its CO2 emissions for 2018. The decision made in the third decade of December to launch the second line of the

Grupa Azoty Zakłady Chemiczne Police Group Page 24 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

ammonia unit led to an increase in CO2 emissions, which resulted in a deficit of 11,949 CO2 emission allowances of the EUA type and 1,449 allowances of the CER type as at December 31st 2018. It should be noted that in 2018 over 98% of the required CO2 emission allowances were purchased. As at the date of authorisation of this report, the Company already covered 100% of its allowance requirement. Changes in key market conditions The first half of 2018 saw an unexpected, sharp increase in the spot prices of gas in Europe, which in early March went over the record levels from six years before. Gas prices remained high throughout 2018. Relative to 2017, the average price of gas increased by approximately 30%, but the growth rate in some periods was even steeper. Over the same period, the average market price of ammonia rose approximately 9%, which prevented the Group from exporting substantial volumes of ammonia.

5.2. Market overview As in previous years, the financial results of the Group in the reporting period were strongly correlated with the situation in the Company’s market environment. Macroeconomic conditions on the agricultural market The first two quarters of the year saw moderate demand for nitrogen and compound fertilizers, as the bulk of purchases had already been made by the agricultural sector in November and December 2017. The purchasing power of farms in the spring season was low as a result of a delay in direct payments and low prices of produce, which farmers – faced with financial difficulties – were often forced to sell on an ongoing basis. The drought experienced in May and June additionally supressed demand from farmers, having delayed the application of fertilizers (third dose for winter grains). The drought affected a number of crops, including winter and spring grains, maize for grains and silage, rape and colza, potatoes, sugar beet, hops, tobacco, field vegetables, fruit shrubs and trees, strawberries and legumes. When soil is dry, it is difficult to apply fertilizers, which can only dissolve and penetrate into plants in the presence of moisture. The government initially earmarked PLN 1.5bn for disaster aid. However, in 2018 the Agency for Restructuring and Modernisation of Agriculture received 334,749 applications for financial relief in connection with drought- or flood-related crop damage, adding up to nearly PLN 2.2bn. Hence, the government decided to raise the allocation for compensations by more than PLN 700m, assuming that disbursements would be resumed in 2019. According to the Agency for Restructuring and Modernisation of Agriculture, direct payments for 2017 were almost fully disbursed by mid-June. It can therefore be assumed that the agricultural sector was again supported with an amount of PLN 14.8bn. The payments were partly applied to purchase nitrogen and compound fertilizers. By November 16th 2018, the Agency for Restructuring and Modernisation of Agriculture transferred to farmers’ accounts PLN 7.7bn in advance direct payments for 2018 (they were received by 1.14m farmers). In the second week of October, the grain prices went up sharply. Three of them: consumable wheat, triticale and feed oats even set their (new) multiannual price highs. In the same month, drought was the main problem faced by farmers, directly affecting the sprouting of winter rape. In many regions of the country, rape needed to be re-sown due to insufficient sprouting. In the meantime, intensive field work was under way including NPK fertilizer spreading and sowing of other winter grains. In November, a large number of farms still held produce stocks, hoping that prices would rise at year- end. In early 2018, wheat prices went down 2% to 4% year on year, with the exception of January, when they were almost 1% higher relative to the same period of the year before. In Q3, the prices of consumable wheat soared year on year, by 20%–22%, except for July 2018, when they were almost 2% lower compared with the corresponding period of the previous year. In Q4, wheat prices were still more than 20% higher year on year in 2018, the difference having even reached 23.7%. In the case of maize, Q3 2018 prices were 0.9% to 9% lower, while Q4 2018 prices were 13.4% to 17.5% higher, year on year.

Grupa Azoty Zakłady Chemiczne Police Group Page 25 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

FERTILIZERS COMPOUND FERTILIZERS NPK fertilizers In 2018, the average market price of NPK 16-16-16 fertilizers was almost 9% higher than the previous year’s average. The price remained around its highest level throughout the last quarter, until the end of the year. In Q1 2018, no rise in demand for phosphate fertilizers was recorded in Poland. Many farmers had fertilizer stocks available for the first application which, owing to the prevailing weather conditions, did not take place until late March. Early April saw the start of intensive farming activity: sowing of grains, maize and oilseed rape, with concurrent application of fertilizers and crop protection chemicals. Despite the delay, the crops caught up thanks to favourable weather conditions. Until mid- May, farmers were optimistic about their crops. However, drought concerns set in afterwards, as heavy losses, to the tune of 40% according to late June estimates, were expected (eventually, they were half that figure). The purchasing power of farms was low in the season as a result of delayed direct payments and low prices of produce. In July and August, there were reports of farmers’ growing debt, directly impacting their purchasing power. Despite the harvest campaign in July, in August the demand for NPK fertilizers in Poland, mainly for use in growing rapeseed, was already quite solid. It stayed strong in September, although the product availability on the market was limited. In the last quarter on the other hand, NPK fertilizers attracted little interest from potential buyers. In Europe, low incomes in agriculture significantly constrained farmers’ purchasing power. The first half of 2018 saw continued weak demand, with the prices of basic NPK fertilizers relatively unchanged, rising slightly only in March and late June. Russian manufacturers placed their output mainly on the home market, selling their products also to South American and Indian customers, but did not make any significant transactions on the European market. A market upturn was seen only in April, mainly in Western Europe. In July, the demand for NPK fertilizers in Western Europe was still growing slowly, most purchases having been made by Germans. A pickup in demand on Western European markets, mainly in France and Ireland, was not seen until September. In Romania, demand for fertilizers was rather subdued by unfavourable weather conditions. Both Czech and Slovak farmers purchased only small quantities of fertilizer products. In July and August, Russian farmers bought fertilizers with a high content of phosphorus and potassium, while in Ukraine small and medium-sized farms showed interest in NPK fertilizers with a high nitrogen content. Higher demand triggered a slight increase in prices. In Lithuania, distributors expressed demand for NPK fertilizers with the autumn fertilizer application season in mind. The demand for NPK fertilizers on the Russian market declined in mid-September, prompting Russian manufacturers to announce price cuts. Demand was inappreciable in the last quarter, as producers focused on markets such as India or South American countries. DAP In 2018, the market price of DAP fertilizer increased more than 20% versus the 2017 average. It kept climbing until September, with a slight correction in March and April. The price of DAP at the end of H1 2018 was almost 12% higher than at the beginning of January 2018. This situation was driven on the one hand by cyclical increases in demand for DAP in those periods of the year, and on the other, by reduced production and delayed deliveries by certain manufacturers. The highest demand was observed in the markets of South America and Asia, where transaction volumes were the largest. In Europe, demand for DAP came mainly from Romania, Slovakia, Bulgaria and Serbia. In H2 2018, the prices of DAP rose until October, when the trend reversed. High demand on their home market made Russian producers reduce MAP exports at the beginning of Q3. The DAP season in Russia ended in September, but the demand for DAP on that market persisted until mid-October. The low demand on China’s home market seen since early September prompted Chinese manufacturers to export some of their products, mainly to India, Pakistan and South America (in particular Brazil). Also Mosaic delivered orders mostly for Brazilian customers. In Central Europe, the demand for DAP was largely from Romanian, Bulgarian and Slovak farmers. In Western Europe, no demand for DAP was seen in France, Germany, Italy and Spain until September. Distributors and farmers bought DAP imported from Russia and Morocco. Starting from mid-November, demand for MAP and DAP was low.

Grupa Azoty Zakłady Chemiczne Police Group Page 26 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Figure 6. Monthly average prices of NPK and DAP fertilizers [USD/t] 600 500 400 300 200 100 0

DAP NPK

RAW MATERIALS FOR THE PRODUCTION OF COMPOUND FERTILIZERS Phosphate rock Compared with 2017, in 2018 phosphate rock market prices increased by approximately 9%-10% on average. The growth rate was even higher on the phosphoric acid market (at approximately 27%). The first increase in phosphate rock market prices in January 2018 was caused by rising prices on the market of phosphate fertilizers, mainly DAP. The second global increase took place at the end of April. The market prices of phosphate rock of certain origins continued to grow slightly in the following quarters. The growth in prices of phosphorus-bearing materials considerably hindered the production of phosphate fertilizers in India, in favour of imports of the finished product. Moreover, due to environmental issues, production was discontinued at one of major sulfuric and phosphoric acid manufacturers, further aggravating the supply problems on the Indian market. Local environmental audits in China were continued in 2018, resulting in permanent closures of several phosphate rock mines in the Sichuan region. At the end of 2018, the global phosphate market slowed down, which sent the prices of phosphate fertilizers falling across almost all markets. The prices of phosphate rock and phosphoric acid remained stable in the last quarter of 2018, but given the slowdown in the fertilizer market, customers (mainly those based in India and Western Europe) began to negotiate price reductions, particularly in the case of phosphoric acid. At the end of Q3 2018, strong demand for DAP and MAP which had continued since the end of 2017 finally weakened as customers opposed further price increases. The global phosphate market slowed down, with sellers and buyers alike adopting a wait-and-see strategy. In consequence of the market downturn, the prices of phosphoric acid and phosphate rock are no longer rising. An addition of new phosphate fertilizer capacities in Morocco did not significantly improve the market supply, as Canada-based Nutrien decided to close down the Redwater fertilizer complex in Canada, which had accounted for almost half of the capacity of the new OCP complex (1.4m tonnes of fertilizers). In H1 2019, the market of phosphate fertilizers is expected to stabilise. Potassium chloride Since early 2018, potassium chloride prices have been growing on most markets. During that time, a number of major producers of potassium chloride announced that they had secured sales of their output for a few months, which – given that certain suppliers had reduced their production capacities in December 2017 and January 2018 – brought about a steady increase in potassium chloride prices across target markets. At the end of Q3 2018, contractual terms of potassium chloride supplies to China and India were agreed for the 2018/2019 season. Compared with contracts for the 2017/2018 season, the prices grew by 26% and 21% for the supplies to China and India, respectively. In 2018, the maximum market prices of potassium chloride increased by approximately 11% on average compared with 2017. Despite the signs of a potential slowdown in the Brazilian market, one of the main consumers of potassium chloride, in the end Brazil reported an 8.8% increase in the volume of potassium chloride purchases relative to 2017. In view of the contracts agreed by China and India with suppliers from Belarus, Israel, Canada and Germany, the beginning of Q4 2018 saw price adjustments for other customers, and prices for other markets increased relative to Q3, for instance by approximately 10% for the United States and Europe and approximately 15% for Brazil. Sulfur 2018 was marked by both steep price increases and sharp declines on the prilled sulfur market. At first, demand was strongly driven by the sector of phosphate fertilizers, but due to the downturn in

Grupa Azoty Zakłady Chemiczne Police Group Page 27 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) the phosphate market in Q4 2018, a price depression hit the prilled sulfur market too towards the year’s end. An additional factor that limited the supply were the US sanctions on Iran, which caused some countries to discontinue their imports of commodities, including sulfur, from that source. Such fluctuations did not affect liquid refinery sulfur, whose price rose at the beginning of every quarter without any downward movements. Compared with 2017, the average price of liquid sulfur grew by nearly 30% in 2018. In 2018, the situation on the European liquid sulfur market, where supply practically matches demand, was additionally affected by force majeure events, i.e. an accident at a major gas plant in Germany producing liquid sulfur, and a long hot summer that hindered water transport logistics. The downturn in the fertilizer market and lower demand for prilled sulfur led to significant price declines in late 2018. Key factors that may trigger further declines include new petrochemical sulfur capacities (higher supply). The prices of liquid sulfur in Western Europe may behave differently, as short-term forecasts do not indicate any possible price falls in 2019. This may result in closely matched supply and demand, lack of new production capacities, closure of some obsolete refineries, and increased use of low-sulfur crude oil in refining. According to projections, prilled sulfur prices are likely to decline in H1, while for liquid sulfur the current price level is expected to continue. NITROGEN PRODUCTS Ammonia The beginning of the year was marked by a slowdown in the ammonia market, with prices following a downward trend. The difficulties were caused by weak demand in the US (driven by a harsh winter, delayed fertilization season, and shutdown of a DAP facility by one producer). Activity was still strongly limited in March, and transactions involved spot or next quarter deliveries. The rising gas prices posed an additional problem for producers. In Q2, the market remained under the pressure of a product overhang, but growing prices were recorded in June. Plant overhauls began around mid- 2018, reducing supply and fuelling price increases seen at that time. The product availability was constrained in the Black Sea and Baltic Sea regions. A temporary rise in ammonia prices was recorded in Q3 2018, but a downward trend emerged in Q4, having lingered until the end of the year. The average price of ammonia in 2018 was almost 9% higher than in 2017. However, the natural gas prices were markedly higher (having gone up approximately 30% in the European markets), inflating the costs of ammonia production. The ratio of ammonia prices to production costs remained unfavourable during most of the year. Figure 7. Monthly average prices of ammonia and urea [USD/t] 500 400 300 200 100 0

Urea Ammonia

Demand from non-traditional markets was on the rise last year. A decline in imports from the US was offset by an increase in purchases from Morocco and China. Two large plants were launched in 2018: Freeport in the US (750 thousand tonnes) and Panca Amara Utama (PAU) in Indonesia (660 thousand tonnes), which should reach their peak capacities in 2019. Urea The average urea price in 2018 was 15% higher than in 2017. In Q1 2018, stagnation was visible not only in the European markets, but also for instance in Brazil. The prices were affected by a lack of interest from farmers due to poor weather conditions, as well as elevated freight rates, which had been raised for the same reason. As a result, some producers withdrew from the market in February. Obstacles were still present on the urea market in March, including continued downward price trends coupled with favourable nitrate offerings on the UK market, seen as an attractive alternative by farmers. In April, the market was still considered slow, with the exception of India. Reportedly, China

Grupa Azoty Zakłady Chemiczne Police Group Page 28 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) utilised only 65% of its urea capacities at that time. No price growth was observed until late May. Demand from Western Europe remained weak over that period. A clear upward trend in urea prices started at the beginning of the third quarter. Interest in the product was seen primarily from Latin America, mainly Argentina, Chile and Mexico, and starting from August also Brazil. That quarter was a maintenance shutdown period, resulting in local supply constraints (Baltic Sea region, Yuzhne). Later in 2018, a decline in urea prices was seen starting from mid-September. In Western Europe, demand for granular urea remained subdued through December. Other products The Company’s RedNOX® segment (products designed to reduce nitric oxide emissions in the automotive and industrial industries) offers the following products: NOXY® (32.5% urea solution, AdBlue®); Likam® (ammonia water); Pulnox® (40% technical-grade urea solution). In the Rednox product segment, despite significant competition among manufacturers, there was a year-on-year increase in sales, both in Poland and in export markets. The sales volume of the entire Group increased by almost 43 thousand tonnes compared with 2017, of which NOXy® accounted for 75%. FEEDSTOCK FOR NITROGEN PRODUCTS Natural gas In 2018, gas prices were soaring across European markets. Relative to 2017, the average price of gas increased by approximately 30%, but in some periods the growth rate was even steeper. The sharp increase was driven by a number of factors, including a double-digit decline in Europe’s natural gas stocks relative to previous years due to a harsh winter spell in late February and early March 2018, caused by an Arctic front with temperatures 10°C below the long-term average. Replenishing of natural gas stocks in Europe was a factor putting pressure on prices. Another relevant factor were the rising prices of other energy commodities: crude oil and coal, combined with a sharp increase in CO2 emission allowance prices. The situation was aggravated by a number of scheduled and unscheduled shutdowns of the gas production and transmission infrastructure from the north, which limited gas supplies. Lower-than-planned LNG supplies to Europe resulting from higher LNG prices in Asian markets were another extremely important factor on the supply side. A series of earthquakes in the area of Groningen in the Netherlands, Europe’s largest continental gas field, hampered the production of gas. The hot summer in Europe fuelled demand for electricity, while nuclear power plants reduced their output due to low water levels in rivers. Electricity shortages were covered by energy from gas- fired power plants, which pushed up the demand for gas. Following changes in the economic and legal environment in 2017, natural gas was purchased from PGNiG S.A. in 2018. Figure 8. Monthly average prices of natural gas [EUR/MWh] 30

25

20

15

10

Gas

PIGMENTS Titanium white Following a series of increases in titanium white prices continuing until mid-2018, contract prices were rolled forward in Q3 2018. By contrast, Q4 was marked by the first significant declines. The average price of titanium white on the European market in 2018 went up 15.2% year on year. The balance of supply and demand shifted towards an oversupply in H2 2018. The global deficit of titanium white was offset mainly by an inflow of the imported Chinese product.

Grupa Azoty Zakłady Chemiczne Police Group Page 29 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Figure 9. Monthly average prices of titanium white in 2018 [EUR/t]

3 000

2 500

2 000

1 500

Titanium white

In the last quarter of 2018, noticeable seasonality was again experienced by Europe’s titanium white market, after a two-year absence, especially in the paints and coatings sector. Customers did not stock up on titanium white due to high inventories and expectations of further price reductions. The tough situation on the titanium white market is expected to continue into H1 2019, and so prices are likely to decline even further, stabilising temporarily during the peak season. Other products Iron sulfate is a by-product of titanium white and steel production. The fourth quarter saw increased demand for sulfate, supported by positive developments on the market. The demand was driven by an excellent situation in the construction segment in Europe, resulting in a high cement production volume, which is likely to remain high until the end of 2019 (although below the current level). Additionally, following reports of a scheduled shutdown of the competing Pori plant, some customers are already planning to purchase larger volumes of sulfate. RAW MATERIALS FOR THE PRODUCTION OF TITANIUM WHITE Ilmenite and titanium slag The prices of titanium-bearing minerals grew along with the prices of titanium white. Ilmenite price movements tend to follow the market price of titanium white with a delay of around six months. Accordingly, the material’s purchase price reached its peak in H1 2018, stabilised in Q3 and started to decline in Q4 as a result of deteriorating conditions on the titanium white market. On the representative Chinese market, the average price of ilmenite fell by 8% in H2 2018 relative to H1 2018. Titanium slag is a metallurgical product obtained by smelting ilmenite with coke. In the absence of investments in new furnaces, there is a clear undersupply on the titanium slag market, especially in the case of slag with a 74% to 76% titanium content, which is used for the production of titanium white in the sulfate process. Some of its existing producers switched from the production of slag with a low titanium content to slag with a higher content of TiO2, in excess of 90%. This is attributable to higher sales margins in the segment which employs the chlorine process to obtain titanium white. Despite the downward trend in titanium white prices, the price of 74%–76% titanium slag in 2018 went up by 36% year on year. Given the undersupply discussed above, the price of titanium slag is expected to remain high.

5.3. Key financial and economic data The Group’s key achievements and highlights in 2018: • very strong performance in Pigments for a second consecutive year, • setting up the Corporate Agro Sales Department, which integrates and coordinates fertilizer sales across the Grupa Azoty Group, in order to reinforce synergies and consolidation effects in line with the Strategy pursued by Grupa Azoty, • the highest fertilizer sales volumes on the prioritised home market in more than a decade, and competing for market shares against imported products, • business diversification towards the market of urea solutions, improved sales of this product category, • implementation of investment projects involving temporary plant shutdowns in 2018 expected to deliver value in the future (upgrade and computerisation of Line E in the phosphoric acid unit), • continuation of ‘Polimery Police’, our flagship investment project, • maintaining financial security in a challenging and volatile market environment.

Grupa Azoty Zakłady Chemiczne Police Group Page 30 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

In 2018, the Group’s EBITDA came in at PLN 122,015 thousand, with a net loss of PLN -33,619 thousand. The financial effect of the loss of control over the subsidiary AFRIG S.A., which reduced the Group’s net result by PLN 44m (for a detailed description, see Section 5.1 of this report), was a significant contributor to the Group’s net loss in the consolidated statement of profit or loss. The recognition of this event led to an increase in finance costs, resulting in the net loss despite positive operating results of the Group. Non-recurring items related to AFRIG S.A. were the main contributor to the Group’s finance costs in 2018, while in 2017 they fuelled a significant increase in other expenses. Despite market headwinds, the Group’s liquidity ratios remained at comfortable levels. Table 18. Consolidated financial results Item 2018 2017 change % change Revenue 2,421,347 2,599,577 -178,230 -6.9 Cost of sales 2,131,442 2,127,968 3,474 0.2 Gross profit 289,905 471,609 -181,704 -38.5 Selling and distribution expenses 112,537 112,976 -439 -0.4 Administrative expenses 160,901 167,764 -6,863 -4.1 Net profit on sales 16,467 190,869 -174,402 -91.4 Other income/(expenses) -8,229 -62,498 54,269 -86.8 EBIT 8,238 128,371 -120,133 -93.6 Finance income/(costs) -61,619 -14,825 -46,794 315.6 Share of profit/(loss) of equity-accounted 12,317 13,103 -786 -6.0 associates Profit before tax -41,064 126,649 -167,713 -132.4 Income tax -7,445 38,141 -45,586 -119.5 Net profit/(loss) -33,619 88,508 -122,127 -138.0

In the same period, the Parent earned a net profit of PLN 29,532 thousand, with EBITDA at PLN 139,788 thousand. Worse performance of the Parent in 2018 relative to the previous reporting period was mainly attributable to the higher prices of strategic raw materials (especially natural gas), combined with unfavourable market prices of ammonia, which significantly constrained ammonia exports. The average prices of almost all strategic raw materials (except for phosphate rock) went up in 2018 vs 2017. Substantial price increases were recorded for natural gas (+25%), potassium chloride (+10%), sulfuric acid (+27%), fine coal (+29%), as well as ilmenite and titanium slag (+14% and +13%, respectively). Cost inflating factors included higher prices of CO2 emission allowances, driven by strong changes in their market prices. Natural gas accounts for approximately 90% of the variable costs of ammonia production. An increase in the market price of ammonia recorded following an initial decline was insufficient to cover the growing production costs, which prevented the Group from exporting substantial volumes of the product. Table 19. Financial results of the Parent Item 2018 2017 change % change Revenue 2,411,461 2,585,370 -173,909 -6.7 Cost of sales 2,138,456 2,129,112 9,344 0.4 Gross profit 273,005 456,258 -183,253 -40.2 Selling and distribution expenses 112,549 112,963 -414 -0.4 Administrative expenses 129,019 136,111 -7,092 -5.2 Net profit on sales 31,437 207,184 -175,747 -84.8 Other income/(expenses) -4,727 -28,292 23,565 -83.3 EBIT 26,710 178,892 -152,182 -85.1 Finance income/(costs) 6,480 -4,990 11,470 -229.9 Profit before tax 33,190 173,902 -140,712 -80.9

Grupa Azoty Zakłady Chemiczne Police Group Page 31 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Income tax 3,658 40,696 -37,038 -91.0 Net profit/(loss) 29,532 133,206 -103,674 -77.8

Apart from constraining the ammonia sales volume, the surge in natural gas prices relative to 2017 fuelled primarily an increase in the cost of its consumption, by approximately PLN 94.5m annually. The Company was unable to pass through the significantly higher costs of gas and other strategic raw materials to its product prices within a short time, which led to deviations in its full-year results. In Q4 2018, the trend in market prices of natural gas reversed as they finally began to go down. Around that time, further declines in the market prices of ammonia also began. Following the Parent’s optimisation efforts, its administrative expenses were reduced by PLN 7,092 thousand compared with 2017. 5.3.1. Segments’ financial results In 2018, the Group posted strong performance in Pigments, on a par with the excellent result achieved in 2017. The previous period aside, it was the best performance for Pigments since 2011. In the case of Fertilizers, the performance was substantially affected by a downturn in relation to 2017, including specifically an unfavourable ratio between the prices of key raw materials consumed and the market prices of products. Table 20. EBIT by segment in 2018 Grupa Azoty POLICE Group Parent Item Fertilizer Other Fertilizer Other Pigments Polymers Pigments s Activities s Activities Revenue from 1,983,015 388,189 51 50,092o 1,985,444 388,190 37,827 external sales Share 82% 16% 0.002% 2% o 82% 16% 2% EBIT -65,537 74,611 -11,873 11,037 o -60,987 74,539 13,158

Figure 10.The Group’s revenue by segment

2 400 000

2 000 000 2017 1 600 000 2018 1 200 000

800 000

Segment

Segment

Pigments Fertilizers Fertilizers

400 000 Other

Segment

Polymers Polymers Activities 0

Figure 11. The Group’s revenue by segment

2018 2017 2% 0,002% 2% 0,002% 15% 16% Fertilizers Pigments Polymers Other

83% 82%

Grupa Azoty Zakłady Chemiczne Police Group Page 32 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

The shares of individual segments in total revenue changed slightly year on year: the Fertilizers Segment’s share decreased, while that of the Pigments Segment increased by 1 pp, with the share of other sales unchanged. Revenue generated by Polymers is immaterial, as the ‘Polimery Police’ project is still under way and the segment has not yet commenced its proper operations. FERTILIZERS In 2018, the Fertilizers Segment’s revenue totalled PLN 1,983,015 thousand, accounting for 82% of the Group’s revenue. Revenue from Fertilizers was 8.5% lower than in 2017. Compound fertilizers had the highest share in the Parent’s revenue by product categories, representing over 70% of the segment’s total revenue. On average, fertilizer and ammonia sales on the prioritised home market accounted for 70% of the segment’s total sales. Figure 12.Consolidated revenue of the Fertilizers Segment

700 000 2 500 -9% 600 000 2 000 500 000 400 000 1 500 300 000 1 000 200 000 500 100 000

0 0

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2017 2018 2014 2015 2016 2017 2018

The operations in Fertilizers generated negative EBIT at PLN -65,537 thousand. The segment’s performance was substantially affected by strong increases in the prices of most key raw materials for fertilizer and ammonia production. A significant portion of the negative deviation relative to 2017 was attributable to sales of nitrogen products, where a surge in the market prices of gas – the key feedstock (by 30% on an annualised basis) – was coupled with a temporary rise in the market prices of ammonia. However, the increase was insufficient to cover the rising variable costs of production, given the level of ammonia market prices. This prevented any significant volumes of the product from being exported. The lower sales of ammonia and factors temporarily supressing demand for fertilizers, such as their increased purchases ahead of the spring season back in Q4 2017 and the prolonged period of very dry weather, additionally eroded the segment’s revenue. The performance of Fertilizers was also strongly affected by a year-on-year increase in the prices of other strategic raw materials (except for phosphate rock), including specifically potassium chloride (up by 10%), coal (up by 29%) and CO2 emission allowances (where the price almost tripled). The Company was unable to fully pass through these substantial increases in raw material prices to product prices in the reporting period. PIGMENTS Very strong performance on Pigments for the second year running was achieved by skilfully taking advantage of developments in the market environment. Although the market saw the first signs of a slowdown in H2 2018 with the first declines in titanium white prices, the segment’s annualised EBIT margin reached 19%. EBIT generated by Pigments in 2018 (of PLN 74,611 thousand) was on a par with the excellent figure posted for 2017. At the same time, the segment’s revenue remained relatively unchanged year on year. In the reporting period, Pigments generated PLN 388,189 thousand in revenue, contributing 16% to the Group’s total revenue.

Grupa Azoty Zakłady Chemiczne Police Group Page 33 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Figure 13. Consolidated revenue of the Pigments Segment 120 000 500 +1% 100 000 400 80 000 300 60 000 40 000 200 20 000 100

0

2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 0 2017 2018 2014 2015 2016 2017 2018

Approximately 63% of the segment’s revenue was derived from sales on foreign markets. Despite a lower sales volume, a slight improvement was seen in revenue. POLYMERS In 2018, the share of PDH Polska S.A.’s assets in total assets of all segments of the Group exceeded 10%. Therefore, a condition was met for identifying a separate reporting segment, i.e. one of the quantitative thresholds specified in IFRS 8 Operating Segments was exceeded. By the Parent Management Board’s decision, PDH Polska S.A. was separated from other activities and is currently presented under a newly identified reporting segment, namely the Polymers Segment. As the ‘Polimery Police’ project is still under way, the Polymers Segment has not yet commenced its proper operations, generating immaterial revenue, while incurring day-to-day running costs. OTHER ACTIVITIES Revenue recognised under ‘Other Activities’ accounts for approximately 2% of the Group’s total sales. Other Activities delivered a net profit of PLN 11,037 thousand. 5.3.2. Operating expenses The Group’s operating expenses were PLN 2,409,805 thousand in 2018, which was very close to the 2017 level (down by PLN 1,822 thousand or -0.1%). A decrease was reported mainly in raw materials and consumables used (which represented almost 70% of total expenses). The main driver of the decrease in relation to 2017 was a lower production volume, especially of ammonia, which was temporarily downscaled due to the high price of natural gas and inability to achieve a positive margin on export markets. The high prices of most key production inputs, including natural gas, potassium chloride and fine coal, considerably inflated the costs of other products across the Company, i.e. compound fertilizers, urea and titanium white. The completion and commissioning of several investment projects (mainly those in the power generation area, such as the FGD unit) and major overhauls brought up the depreciation charges. Wages and salaries, including surcharges, increased year on year, chiefly due to the execution of collective pay agreements and an increase in actuarial charges compared with 2017. Table 21. The Group’s costs by nature of expense Item 2018 2017 change % change Amortisation and depreciation 113,777 102,148 11,629 11 Raw materials and consumables used 1,614,516 1,637,424 -22,908 -1 Services 166,879 187,497 -20,618 -11 Wages and salaries, including surcharges, and 355,430 335,004 20,426 6 other benefits Taxes and charges 124,721 100,268 24,453 24 Other costs by nature of expense 34,482 49,286 -14,804 -30

Grupa Azoty Zakłady Chemiczne Police Group Page 34 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Table 22. The Parent’s costs by nature of expense Item 2018 2017 change % change Amortisation and depreciation 113,078 99,970 13,108 13 Raw materials and consumables used 1,592,739 1,618,885 -26,146 -2 Services 246,306 246,500 -194 0 Wages and salaries, including surcharges, and 265,050 251,233 13,817 5 other benefits Taxes and charges 121,763 94,591 27,172 29 Other costs by nature of expense 33,195 47,598 -14,403 -30

The lower cost of services was mainly attributable to marketing packages, due to a change in that item’s presentation. In 2017 they were disclosed under services, while in 2018 they reduced revenue. Taxes and charges increased, due mainly to the higher cost of CO2 emission allowances, which almost tripled. Administrative expenses fell considerably (by 4%) across the Group (5% at the Parent), primarily on the back of optimisation measures implemented by the Management Board and cost cuts in advertising and other areas.

5.3.3. Structure of assets, equity and liabilities In 2018, the Group’s assets were PLN 2,165,926 thousand, having increased by 9% on the end of 2017. As at December 31st 2018, the amount of non-current assets was PLN 1,637,006 thousand, and current assets were PLN 731,429 thousand. Table 23. Structure of the Group’s assets Item 2018 2017 change % change Non-current assets, including: 1,637,006 1,526,886 110,120 7 Property, plant and equipment 1,472,067 1,407,252 64,815 5 Perpetual usufruct of land 6,224 6,690 -466 -7 Investment property 6,168 5,381 787 15 Intangible assets 48,784 34,013 14,771 43 Equity-accounted investees 26,180 26,964 -784 -3 Other receivables 32,888 9,154 23,734 259 Deferred tax assets 44,695 37,432 7,263 19 Current assets, including: 731,429 639,040 92,389 14 Inventories 315,843 253,108 62,735 25 Property rights 55,291 32,223 23,068 72 Current tax assets 8,493 832 7,661 921 Other financial assets 2,951 0 2,951 - Trade and other receivables 181,159 200,498 -19,339 -10 Cash and cash equivalents 160,209 145,003 15,206 10 Non-current assets held for sale 7,483 7,376 107 1 Total assets 2,368,435 2,165,926 202,509 9

Year on year, the most significant movements in assets in 2018 included: • a 5% (PLN 64,815 thousand) increase in property, plant and equipment, attributable to new investment projects having been placed in service, • a 43% (PLN 14,771 thousand) increase in intangible assets, driven mainly by a substantial increase in intangible assets under construction at PDH Polska S.A., • a PLN 23,734 thousand increase in other receivables resulting from prepaid deliveries of intangible assets totalling PLN 19,084 thousand reported by PDH Polska S.A., • a 25% (PLN 62,735 thousand) increase in inventories, chiefly on a significant increase in the value

Grupa Azoty Zakłady Chemiczne Police Group Page 35 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

of materials (by PLN 31,439 thousand) and finished products (by PLN 23,405 thousand) at the Parent, • a 72% (PLN 23,068 thousand) increase in property rights due to the higher amount of CO2 emission allowances at the Parent, • a PLN 7,661 thousand increase in current tax assets resulting from an income tax refund (year to date, the Parent reported a tax loss), • a 10% (PLN 15,206 thousand) increase in cash and cash equivalents in bank accounts, • a 10% (PLN 19,339 thousand) decrease in trade receivables related to lower revenue generated by the Parent. Table 24. Structure of the Group’s equity and liabilities Item 2018 2017 change % change Equity 1,199,963 1,121,764 78,199 7 Non-current liabilities, including: 465,120 417,123 47,997 12 Borrowings 297,140 260,427 36,713 14 Other financial liabilities 7,953 7,128 825 12 Employee benefit obligations 65,704 62,347 3,357 5 Other obligations 3,873 3,016 857 28 Provisions 68,018 58,054 9,964 17 Grants 22,369 26,109 -3,740 -14 Deferred tax liability 63 42 21 50 Current liabilities, including: 703,352 627,039 76,313 12 Borrowings 60,011 117,705 -57,694 -49 Other financial liabilities 25,275 1,673 23,602 1411 Employee benefit obligations 8,540 8,488 52 1

Current tax liabilities 59 347 -288 -83

Trade and other payables 602,559 488,536 114,023 23 Provisions 4,727 8,107 -3,380 -42 Grants 1,986 2,063 -77 -4 Liabilities directly related to assets held for 195 120 75 63 sale Total liabilities 1,168,472 1,044,162 124,310 12 Total equity and liabilities 2,368,435 2,165,926 202,509 9

Significant changes in the Group’s equity and liabilities in the reporting period: • a 7% (PLN 78,199 thousand) increase in the Group’s equity vs 2017, driven mainly by an increase in equity attributable to non-controlling interests following the acquisition of a portion of new shares in PDH Polska S.A. by Grupa Azoty S.A., • a 12% (PLN 47,997 thousand) year-on-year increase in non-current liabilities, mainly due to a 14% (PLN 36,713 thousand) increase in borrowings and a 17% (PLN 9,964 thousand) increase in provisions, • a 12% (PLN 76,313 thousand) year-on-year increase in the carrying amount of current liabilities, resulting primarily from higher trade and other payables (up PLN 114,023 thousand), with lower short-term borrowings (down PLN 57,694 thousand).

Grupa Azoty Zakłady Chemiczne Police Group Page 36 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Table 25. Structure of the Parent’s assets Item 2018 2017 change % change Non-current assets, including: 1,689,348 1,615,800 73,548 5 Property, plant and equipment 1,372,529 1,321,376 51,153 4 Perpetual usufruct of land 4,959 5,519 -560 -10 Investment property 27,693 26,960 733 3 Intangible assets 18,425 22,173 -3,748 -17 Shares 238,248 208,486 29,762 14 Other receivables 513 513 0 0 Deferred tax assets 26,981 30,773 -3,792 -12 Current assets, including: 605,846 557,689 48,157 9 Inventories 314,966 251,942 63,024 25 Property rights 55,291 32,223 23,068 72 Current tax assets 8,493 828 7,665 926 Other financial assets 2,951 0 2,951 - Trade and other receivables 175,117 188,640 -13,523 -7 Cash and cash equivalents 32,913 69,338 -36,425 -53 Non-current assets held for sale 16,115 14,718 1,397 9 Total assets 2,295,194 2,173,489 121,705 6

In 2018, the Company’s assets increased to PLN 2,295,194 thousand, or 6% on the end of 2017. As at December 31st 2018, non-current assets stood at PLN 1,582,884 thousand, and current assets at PLN 605,846 thousand. Year on year, the most significant changes in assets included: • a 4% (PLN 51,153 thousand) increase in property, plant and equipment, attributable to new investment projects having been placed in service, • a 14% (PLN 29,762 thousand) increase in the value of shares, attributable mainly to the acquisition of PLN 30,000 thousand worth of financial assets in PDH Polska S.A., • a 17% (PLN 3,748 thousand) decrease in intangible assets due to amortisation exceeding the total value of intangible assets placed in service, • a 7% (PLN 13,523 thousand) reduction in trade receivables, • a PLN 36,425 thousand decrease in cash and cash equivalents in bank accounts. Significant changes in the Company’s equity and liabilities in the reporting period: • a PLN 118,645 thousand increase in long-term borrowings, due mainly to the recognition of a credit facility assumed by the Company as a co-borrower, but drawn solely by AFRIG S.A., of PLN 86,732 thousand (with parallel reversal of the existing provision for surety securing the credit facility), as well as disbursement of another tranche of a long-term PLN 40,000 thousand loan from Grupa Azoty S.A. to finance the payment towards the share capital of PDH Polska S.A., • a PLN 71,940 thousand decrease in long-term provisions, caused mainly by the use of a PLN 86,732 thousand provision for surety securing the credit facility granted to AFRIG S.A. (due to its reclassification to long-term borrowings) and a PLN 10,269 thousand increase in provisions for environmental protection, including site restoration, • a PLN 121,554 thousand increase in trade and other payables, partially offset by a PLN 57,693 thousand reduction in borrowings.

Grupa Azoty Zakłady Chemiczne Police Group Page 37 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Table 26. Structure of the Parent’s equity and liabilities Item 2018 2017 change % change Equity 1,149,971 1,161,629 -11,658 -1 Non-current liabilities, including: 445,681 396,153 49,528 13 Borrowings 297,140 178,495 118,645 66 Other financial liabilities 4,223 2,920 1,303 45 Employee benefit obligations 53,441 50,438 3,003 6 Other obligations 645 296 349 118 Provisions 67,863 139,803 -71,940 -51 Grants 22,369 24,201 -1,832 -8 Current liabilities, including: 699,542 615,707 83,835 14 Borrowings 60,011 117,704 -57,693 -49 Other financial liabilities 24,022 895 23,127 2584 Employee benefit obligations 6,618 6,548 70 1 Trade and other payables 602,442 480,888 121,554 25 Provisions 4,463 7,609 -3,146 -41 Grants 1,986 2,063 -77 -4 Total liabilities 1,145,223 1,011,860 133,363 13 Total equity and liabilities 2,295,194 2,173,489 121,705 6

5.3.4. Financial ratios Profitability In connection with the re-transfer of AFRIG S.A. shares in exchange for the expected refund, spread over a five-year period, of amounts paid for the acquisition of the shares and derecognition of the former subsidiary (taking into account liabilities assumed by the Company under the credit facility drawn by AFRIG S.A., with a zero fair value recognised for the recourse claim related to AFRIG’s obligation to repay the credit facility), the Group reported a net loss for 2018, which in turn led to negative net profit-based profitability ratios. On the separate basis, the Company’s net profit was positive despite a challenging market environment. Compared with the previous year, operating profit margins reflected the Company’s worse financial performance. This was mostly due to adverse revenue-to-cost ratios, particularly in the Fertilizers Segment (on account of a significant increase in natural gas prices coupled with much lower growth rate in the market prices of ammonia, among other factors). Table 27. Profitability ratios Grupa Azoty POLICE Parent Ratio Group 2018 2017 2018 2017 Gross profit margin 12% 18% 11% 18% EBIT margin 0% 5% 1% 7% EBITDA margin 5% 9% 6% 11% Net profit margin -1% 3% 1% 5% ROA -1% 4% 1% 6% ROCE 0% 8% 2% 11% ROE -3% 8% 3% 11% Return on non-current assets -2% 6% 2% 8% Ratio formulas: Gross profit margin = gross profit (loss) / revenue (statement of comprehensive income by function) EBIT margin = EBIT / revenue EBITDA margin = EBITDA / revenue Net profit margin = net profit (loss) / revenue ROA (return on assets) = net profit (loss) / total assets

Grupa Azoty Zakłady Chemiczne Police Group Page 38 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Return on capital employed (ROCE) = EBIT / (total assets less current liabilities) Return on equity (ROE) = net profit (loss) / equity Return on non-current assets = net profit (loss) / non-current assets Liquidity In 2018, the liquidity ratios were similar to those reported in 2017, and reflected the Group’s and the Parent’s safe liquidity positions. Table 28. Liquidity ratios Grupa Azoty POLICE Parent Ratio Group 2018 2017 2018 2017 Current ratio 1.0 1.0 0.9 0.9 Quick ratio 0.6 0.6 0.4 0.5 Cash ratio 0.2 0.2 0.1 0.1

Ratio formulas: Current ratio = current assets / current liabilities Quick ratio = (current assets - inventories - current prepayments and accrued income) / current liabilities Cash ratio = (cash + other financial assets) / current liabilities. Operating efficiency The average collection period in 2018 remained virtually unchanged year on year. Relative to 2017, the Parent’s inventory turnover was 10 days longer, due to a considerable 25% increase in inventories. The Parent’s average payment period was 20 days longer, mainly due to a substantial 25% increase in trade payables. The cash conversion cycle was 10 days shorter. Similar trends were also observed at the Group level. Table 29. Operating efficiency ratios Grupa Azoty POLICE Parent Ratio Group 2018 2017 2018 2017 Inventory turnover period (days) 53 43 53 43 Average collection period (days) 27 28 26 26 Average payment period (days) 102 83 101 81 Cash conversion cycle -22 -12 -22 -12

Ratio formulas: Inventory turnover in days = (inventory * 360) / cost of sales Average collection period in days = (trade and other receivables * 360) / revenue Average payment period in days = (trade and other payables * 360) / cost of sales Cash conversion cycle = inventory turnover in days + average collection period in days - average payment period in days Debt In 2018, the Parent’s and Group’s debt ratios were safe. The Parent’s total debt ratio increased 3 pp year on year in 2018, as liabilities grew faster than assets (13% vs 6%, respectively). A 2 pp increase in the short-term debt ratio was recorded, with a parallel slight increase in the long-term debt ratio. Despite a 15 pp decrease in the equity-to-debt ratio, it was still safe for the Company. Similar yet smaller changes were seen in the Group’s debt ratios. Table 30. Debt ratios Grupa Azoty POLICE Parent Ratio Group 2018 2017 2018 2017 Total debt ratio 49% 48% 50% 47% Long-term debt ratio 20% 19% 19% 18%

Grupa Azoty Zakłady Chemiczne Police Group Page 39 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Short-term debt ratio 30% 29% 30% 28% Equity-to-debt ratio 103% 107% 100% 115%

Ratio formulas: Total debt ratio = current and non-current liabilities / total assets Long-term debt ratio = non-current liabilities / total assets Short-term debt ratio = current liabilities / total assets Equity-to-debt ratio = equity / current and non-current liabilities

5.4. Management of capital and assets In the reporting period, the financial results of the Group were closely correlated with the market environment. This correlation, still observed and confirmed on the market, remains beyond the Group’s direct influence or control. Generation of positive margins on the main products sold both on the domestic market and abroad remains the key factor determining the Group’s development, including growth of its financial resources and assets. The Company identifies and manages its liquidity risk, and follows an active cash flow (payables and receivables) management policy by using tools such as trade credit and advance payment in the settlement of sale transactions, as well as control of payment deadlines in purchase transactions. Currency risk is reduced through natural hedging. The Company matches single currency inflows and outflows arising in connection with purchases of key raw materials and sales of products to foreign markets. To secure financial liquidity, the Company uses external sources of financing. Loans are repaid using current cash flows, but the Company always maintains a safe level of credit reserve for use when necessary. Since April 2015, the Parent has been a party to an agreement for intragroup financing between Grupa Azoty S.A., Grupa Azoty Zakłady Azotowe Puławy S.A., Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. and Grupa Azoty Zakłady Chemiczne Police S.A. Under the agreement, additional financing for short- and long-term corporate needs is available to the Parent. On December 14th 2018, Grupa Azoty S.A. and its Key Subsidiaries, including the Company, executed a Payment Services Agreement with Banco Santander S.A. for up to PLN 250m in order to finance payments under commercial transactions with the suppliers of the Company and other Grupa Azoty Group companies. The agreement was concluded for an indefinite period. As security, Grupa Azoty S.A. submitted a notarised declaration on voluntary submission to enforcement under the Payment Services Agreement for up to 120% of the financing limit granted under this Agreement, i.e. up to PLN 300m. As at the end of 2018, the limit was only slightly utilised.

5.5. Bank deposits The Parent uses PLN-denominated overdraft facilities. Surplus cash is placed on PLN, USD and EUR overnight deposits under separate agreements. The Parent had no bank deposits as at December 31st 2018. 5.6. Borrowings Under the consolidated financing model in place across the Grupa Azoty Group, the Company uses a harmonised package of corporate agreements which guarantee its long-term financial security. The Company’s bilateral agreements are also consistent with this package. Table 31. The Group’s liabilities under bank loans as at December 31st 2018* Bank / Amount Utilisation Available Limit Currency Type of liability drawn (%) amount

PKO BP S.A. 62,000 4,318 PLN 7 57,682 Multi-purpose credit facility limit

PKO BP S.A. 208,900 86,351 PLN 41 122,369 Overdraft facility

Grupa Azoty Zakłady Chemiczne Police Group Page 40 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

BGK S.A. 80,000 7,207 PLN 9 72,793 Overdraft facility BGK S.A. Non-revolving working capital 20,000 20,000 EUR 100 0 facility * In nominal terms. The Parent uses a multi-purpose credit facility of PLN 62,000 thousand under an agreement with PKO BP S.A. As at December 31st 2018, no amount was outstanding under this working capital facility, but PLN 4,318 thousand was drawn for guarantees. The remaining amount, of PLN 57,682 thousand, remains available to be used for further guarantees, letters of credit and as a working capital facility. The agreement expires on September 30th 2022. The Parent and its subsidiaries use an overdraft facility under an agreement between Grupa Azoty S.A. and PKO BP S.A., supported by an additional physical cash pooling service. The available limit is PLN 208,900 thousand. The overdraft facility agreement expires on September 30th 2022. The limit available to the Parent is PLN 200,500 thousand and consists of a credit limit (PLN 110,500 thousand) and a Daily Limit for physical cash pooling (PLN 90,000 thousand). As at December 31st 2018, the amount outstanding under the agreement was PLN 86,351 thousand. Under the same credit facility, the following limits are available to the Company’s subsidiaries: • Grupa Azoty POLICE Serwis Sp. z o.o. PLN 8,000 thousand, • Koncept Sp. z o.o. PLN 200 thousand, • Transtech Sp. z o.o. PLN 100 thousand, • Zarząd Morskiego Portu Police Sp. z o.o. PLN 100 thousand. As at December 31st 2018, none of the subsidiaries had any overdraft debt outstanding at PKO BP S.A. In January 2017, the Parent executed a PLN 80,000 thousand overdraft facility agreement with Bank Gospodarstwa Krajowego. The agreement’s term is 36 months. As at December 31st 2018, the amount of debt outstanding under the agreement was PLN 7,207 thousand. On December 21st 2018, the Company signed an EUR 20,000 thousand non-revolving working capital facility agreement with Bank Gospodarstwa Krajowego. As at December 31st 2018, the amount drawn under the facility was EUR 20,000 thousand. The agreement will expire on December 31st 2023. The facility from BGK was used by the Company to refinance existing debt under the multi-purpose line of credit with BGŻ BNP Paribas S.A., assumed by the Parent as a co-borrower but drawn solely by AFRIG S.A. The Parent still has a recourse claim against AFRIG S.A. with regard to the obligation to repay the equivalent of the facility amount drawn by the subsidiary (EUR 20,079 thousand plus service costs). The terms of the facility servicing and repayment are set out in a trilateral agreement between the Company, AFRIG S.A. and DGG ECO Sp. z o.o. The credit facility agreement with BGK offers more favourable pricing terms than the previous facility. Table 32. The Group’s liabilities under borrowings from related parties as at December 31st 2018* Related party / Curren Available Amount Amount drawn Utilisation (%) Type of liability cy amount

Grupa Azoty S.A. 104,000 6,000 PLN 100 0 Investment loan

Grupa Azoty S.A. Loan for payment towards 60,000 60,000 PLN 100 0 PDH Polska S.A. share capital * In nominal terms.

On September 14th 2015, under the intragroup financing agreement of April 23rd 2015, Grupa Azoty S.A. advanced the following loans to the Company: • a PLN 104,000 thousand loan, of which PLN 78,000 thousand was utilised to cover the Parent’s capital expenditure. As at December 31st 2018, the amount outstanding under the loan was PLN 6,000 thousand. The Company decided not to draw the last tranche of PLN 26,000 thousand;

Grupa Azoty Zakłady Chemiczne Police Group Page 41 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

• a PLN 60,000 thousand loan to finance the payment towards the share capital of PDH Polska Spółka Akcyjna, a newly established subsidiary. The entire amount of the loan was disbursed. Repayment of principal will commence in January 2020. As at December 31st 2018, the amount outstanding under the agreement was PLN 60,000 thousand. Table 33. The Group’s liabilities under non-bank borrowings as at December 31st 2018* Co-financing institution/ Curren Utilisation Amount Amount drawn cy % Project Regional Fund for Environmental Protection and Water Management in Szczecin 90,000 44,954 PLN 100 Exhaust gas treatment unit and upgrade of EC II CHP plant

National Fund for Environmental Protection 90,000 67,495 PLN 100 and Water Management in Szczecin Upgrade of ammonia synthesis process * In nominal terms.

The Company has a 10-year PLN 90,000 thousand loan obtained from the Regional Fund for Environmental Protection and Water Management in Szczecin, to finance the project ‘Emissions treatment unit and upgrade of the EC II CHP plant at Zakłady Chemiczne Police S.A.’. The entire amount of the loan was disbursed. The loan is scheduled for repayment by December 31st 2022. As at December 31st 2018, the amount outstanding under the loan was PLN 44,954 thousand. A 10-year PLN 90,000 thousand loan from the Regional Fund for Environmental Protection and Water Management in Warsaw to finance the ‘Upgrade of ammonia synthesis process at Zakłady Chemiczne Police S.A.’ project. The loan was disbursed in full. The loan agreement expires on December 20th 2023. As at December 31st 2018, the amount outstanding under the loan was PLN 67,495 thousand.

Grupa Azoty Zakłady Chemiczne Police Group Page 42 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Borrowing agreements concluded or terminated during the financial year In December 2018, the Parent signed an agreement for a non-revolving working capital facility with Bank Gospodarstwa Krajowego of up to EUR 20,000 thousand, bearing interest based on 1M EURIBOR plus a margin, which was used to refinance existing debt under the multi-purpose line of credit provided by BGŻ BNP Paribas S.A. The credit facility agreement with BGK offers more favourable pricing terms than the previous facility. As at December 31st 2018, the amount of debt outstanding under the agreement was EUR 20,000 thousand. The agreement will expire on December 31st 2023. Table 34. Material financing agreements entered into or amended in 2018 and by the date of this report Agreement Amendment Currency Amount Maturity date date Execution of an EUR- Dec 21 2018 EUR 20,000 Dec 31 2023 denominated credit facility agreement with BGK 5.7. Loans advanced Loans advanced to the Group’s related entities The Parent granted the following loans to Supra Agrochemia Sp. z o.o.: • On March 14th 2014, a PLN 3,600 thousand loan to finance the subsidiary’s capital expenditure. As at December 31st 2018, the amount outstanding under the loan was PLN 3,600 thousand. The loan is to be repaid by June 30th 2019. • On December 31st 2014, a PLN 10,000 thousand loan to finance the subsidiary’s capital expenditure. In 2018, the Parent disbursed the last tranche under the loan, amounting to PLN 350 thousand. As at December 31st 2018, the amount outstanding under the loan was PLN 10,000 thousand. The loan is to be repaid by June 30th 2019. • On June 28th 2018, a PLN 1,000 thousand loan to secure the funding required to complete a share disposal process. In 2018, the Parent disbursed four tranches under the loan. As at December 31st 2018, the amount outstanding under the loan was PLN 480 thousand. The loan is to be repaid by June 30th 2019.

5.8. Sureties and guarantees received and issued In 2018, the Grupa Azoty Police Group neither issued nor amended any guarantees whose total amount would exceed 10% of the Parent’s equity. On January 25th 2018, a guarantee agreement was concluded between the European Investment Bank (“EIB”) of Luxembourg and the key subsidiaries of Grupa Azoty S.A., including the Company, Grupa Azoty Zakłady Azotowe Puławy S.A. and Grupa Azoty Zakłady Azotowe Kędzierzyn S.A.13 The guarantee secures a loan agreement. The guarantee was provided as security under a EUR 145,000 thousand credit facility agreement (the “EIB Agreement”) which is an integral part of Grupa Azoty’s long-term financing package used to fund the Group’s general corporate needs, including strategy implementation and investments, as well as research and development. The maximum amount of the guarantee provided by each of the guarantors, including the Company, was agreed at EUR 58,000 thousand, i.e. the aggregate amount of the guarantee is EUR 174,000 thousand. Each guarantor is severally liable for the Borrower’s obligations up to its agreed maximum liability (guarantee amount). If the Borrower fails to satisfy its obligations under the EIB Agreement, the EIB may seek payment of any outstanding amounts by the guarantors. The guarantee expires on the expiry of the security term, ending on the repayment of debt under the EIB Agreement (concluded for a period of ten years starting from disbursement), to be repaid in instalments, starting within three years of the disbursement.

13 For details, see Current Report No. 2/2018 of January 29th 2018 – Provision of guarantee to EIB.

Grupa Azoty Zakłady Chemiczne Police Group Page 43 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Sureties for credit facilities Table 35. Sureties provided by the Parent as at December 31st 2018 Type/ Currenc Beneficiary Details Date Amount Issuer y Surety for syndicated Grupa Azoty Revolving credit PLN Jun 29 2018 1,200,000 credit facility S.A. facility agreement Surety for PKO BP credit Grupa Azoty Overdraft facility PLN Jun 29 2018 124,000 facility (overdraft) S.A. agreement Surety for PKO BP credit Grupa Azoty Multi-purpose credit PLN Jun 29 2018 96,000 facility (MPCF) S.A. facility agreement Guarantee of repayment of Grupa Azoty Credit facility PLN May 28 2015 220,000 EIB credit facility S.A. agreement Guarantee of repayment of Grupa Azoty Credit facility PLN May 28 2015 60,000 EBRD credit facility S.A. agreement Guarantee of repayment of Grupa Azoty Credit facility PLN Jan 25 2018 249 400* EIB credit facility S.A. agreement Guarantee of repayment of Grupa Azoty Credit facility PLN Jul 26 2018 200,000 EBRD credit facility S.A. agreement 2,149,400 * EUR-denominated guarantee for EUR 58,000 thousand.

The guarantee was provided on arm’s length terms for good consideration. The remaining provisions of the guarantee agreement with the EIB do not differ from standard terms used in agreements of such type. On June 29th 2018, a surety agreement was signed to a revolving credit facility granted by a syndicate of commercial banks to Grupa Azoty S.A., superseding the previous surety agreement of April 23rd 2015. The execution of the new agreement was required due to supplementation of the revolving credit facility agreement, which increases its amount to PLN 3,000,000 thousand and extends its availability period until June 28th 2025. The maximum surety amount for the Company is PLN 1,200,000 thousand. On June 29th 2018, a surety agreement was signed to an overdraft facility agreement with PKO BP S.A., superseding the previous surety agreement of September 20th 2016. The execution of the new agreement was required due to supplementation of the overdraft facility agreement, extending the facility’s availability period until September 30th 2022. The maximum surety amount remained unchanged at PLN 124,000 thousand. On June 29th 2018, a surety agreement was signed to a multi-purpose credit facility agreement with PKO BP S.A., superseding the previous surety agreement of September 20th 2016. The execution of the new agreement was required due to supplementation of the multi-purpose credit facility agreement, extending the facility’s availability period until September 30th 2022. The maximum surety amount remained unchanged at PLN 96,000 thousand. In connection with the long-term credit facility agreement concluded on July 26th 2018 (Second EBRD Agreement) between Grupa Azoty S.A. (GA S.A.) and the European Bank for Reconstruction and Development of London (EBRD), for up to PLN 500,000 thousand, a guarantee agreement was concluded between the EBRD and the Key Companies of the Grupa Azoty Group for a total amount of PLN 600,000 thousand. The maximum amount of the guarantee provided by the Parent was set at PLN 200,000 thousand, representing one-third of the total amount of the guarantee. In 2018, the Parent provided five new guarantees for a total amount of PLN 7,388 thousand.

Grupa Azoty Zakłady Chemiczne Police Group Page 44 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Table 36.Guarantees provided by the Parent in 2018 Type/ Curren Beneficiary Details Date Amount Issuer cy Guarantor’s obligation as STATE PKO BP S.A. general security in PLN Mar 20 2018 1,000 TREASURY customs transactions (...) Payment guarantee for GAZ-SYSTEM PKO BP S.A. gas fuel transmission PLN Jan 1 2018 391 S.A. contract Payment guarantee for GAZ-SYSTEM Feb 28 2018 PKO BP S.A. gas fuel transmission PLN 3,979 S.A. (annex) contract Performance bond in open Apr 13 2018 PKO BP S.A. PGE S.A. PLN 316 tender contract (annex) STATE TREASURY Performance bond for iron (GIOŚ – Chief PKO BP S.A. sulfate (waste) supply PLN Apr 19 2018 1,702 Environmenta contract l Protection Inspector) 7,388

Table 37. Guarantees provided by the Parent as at December 31st 2018 Type/ Curren Beneficiary Details Date Amount Issuer cy Performance bond in open Apr 13 2018 PKO BP S.A. PGE S.A. PLN 316 tender contract (annex) Guarantor’s obligation as STATE PKO BP S.A. general security in PLN Mar 20 2018 1,000 TREASURY customs transactions (...) Payment guarantee for Nov 15 2017 PKO BP S.A. PSE S.A. electricity transmission PLN 1,300 (annex) contract STATE TREASURY Performance bond for iron (GIOŚ – Chief PKO BP S.A. sulfate (waste) supply PLN Apr 19 2018 1,702 Environmenta contract l Protection Inspector) 4,318

As at December 31st 2018, PDH Polska S.A. was the only Group company to have provided a guarantee in the form of a stand-by letter of credit. Table 38. Guarantees provided by subsidiaries as at December 31st 2018 Type/ Curren Beneficiary Details Date Amount Issuer cy Stand-by letter of credit Grace 5,120 PKO BP S.A. Security for obligation to pay USD Dec 06 2018 Technologies (19,250 PLN) licence provider

Grupa Azoty Zakłady Chemiczne Police Group Page 45 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

19,250

Given the nature and term of the letter of credit, the security was presented in the statement of financial position as other long-term receivables. In 2018, the Parent received guarantees for a total amount of PLN 6,657 thousand.

Table 39. Highest-amount guarantees received by the Parent in 2018 Type/ Currenc Beneficiary Date Amount Issuer y Grupa Azoty Zakłady Aries Spa PLN Oct 05 2018 2,150 Chemiczne Police S.A.

Grupa Azoty Zakłady Toyota Material Handling Polska PLN Aug 07 2018 1,500 Chemiczne Police S.A. Sp. z o.o.

Handel Rolno - Spożywczy Grupa Azoty Zakłady PLN Dec 20 2018 1,300 Przemysłowy i Budowlany Trans Chemiczne Police S.A. - Rol Józef Andrzej Remisiewicz

Grupa Azoty Zakłady Blau Chem Sp. z o.o. PLN Nov 29 2018 500 Chemiczne Police S.A.

Consortium of DGP Clean Partner Sp. z o.o. (leader), PU Grupa Azoty Zakłady GOS-ZEC Sp. z o.o., SEBAN Sp. z PLN Jun 01 2018 255 Chemiczne Police S.A. o.o., 7 MG Sp. z o.o., and DGP PROVIDER Sp. z o.o. 5,705

As at December 31st 2018, the Parent had guarantees received for a total amount of PLN 16,220 thousand.

Table 40. Highest-amount guarantees received by the Parent as at December 31st 2018 Type/ Currenc Beneficiary Date Amount Issuer y Grupa Azoty Zakłady Aries Spa PLN Oct 05 2018 2,150 Chemiczne Police S.A.

Grupa Azoty Zakłady Toyota Material Handling PLN Aug 07 2018 1,500 Chemiczne Police S.A. Polska Sp. z o.o.

Grupa Azoty Zakłady Zakłady Remontowe PLN Mar 16 2016 1,473 Chemiczne Police S.A. Energetyki Katowice S.A.

Grupa Azoty Zakłady Zakłady Remontowe PLN Aug 22 2017 1,395 Chemiczne Police S.A. Energetyki Katowice S.A.

Handel Rolno - Spożywczy Grupa Azoty Zakłady Przemysłowy i Budowlany PLN Dec 20 2018 1,300 Chemiczne Police S.A. Trans - Rol Józef Andrzej Remisiewicz 7,818

As at December 31st 2018, Grupa Azoty Police Serwis Sp. z o.o. was the only Group company to have received guarantees. Table 41. Highest-amount guarantees provided by subsidiaries as at December 31st 2018 Type/ Currenc Beneficiary Date Amount Issuer y Grupa Azoty Police ERBUD S.A. PLN Sep 07 2015 873 Serwis Sp. z o.o.

Grupa Azoty Zakłady Chemiczne Police Group Page 46 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Grupa Azoty Police PLN Oct 06 2015 689 ERBUD S.A. Serwis Sp. z o.o. Grupa Azoty Police PLN Dec 21 2018 613 Calbud Sp. z o.o. Serwis Sp. z o.o. Grupa Azoty Police PLN May 16 2016 399 Gamles sp. z o.o. Serwis Sp. z o.o. Grupa Azoty Police PLN Feb 21 2018 304 Calbud Sp. z o.o. Serwis Sp. z o.o. 2,878

As at December 31st 2018, the Group’s subsidiaries had guarantees received for a total amount of PLN 6,812 thousand.

5.9. Material off-balance-sheet items Promissory notes As at December 31st 2018, there was only one valid blank promissory note at the Company, issued as security for the PLN 90,000 thousand loan advanced by the National Fund for Environmental Protection and Water Management of Warsaw as co-financing for the investment project ‘Upgrade of the ammonia synthesis process at Zakłady Chemiczne Police S.A.’ Blank promissory notes issued by the Company and guarantees issued by banks upon instructions from the Company as security for liabilities recognised in the statement of financial position or liabilities with respect to which the likelihood of cash outflows to settle the liability is very low are not presented as contingent liabilities.

5.10. Financial instruments As part of its financial risk management policy, the Company identifies the following risks and has adopted the following risk management objectives and methods: Currency and interest rate risk management The Company manages currency and interest rate risk in line with the ‘Financial (Currency and Interest Rate) Risk Management Policy’, which was adopted in 2015 as an element of the Grupa Azoty Group’s centralised Financing Model to be applied by those members of the Group which are exposed to material currency and interest rate risks. In accordance with the policy, the objective of currency risk management at the Company is to reduce the impact of adverse exchange rate movements on the Company’s cash flows to a level acceptable by the Company, determined in accordance with the VaR methodology. The objective of interest rate risk management is to optimise interest rates with a view to minimising the cost of interest on debt and improving profitability of financial assets. The Parent is exposed to currency risk resulting from its net exposure to the euro and the US dollar related to the foreign currency balance of its sale and procurement transactions, trade receivables and payables, as well as receivables and liabilities from financing and investing activities. The Company is also exposed to the risk of temporary strong exchange rate volatility, including the effect of EUR/USD exchange rate development on the EUR/PLN and USD/PLN exchange rates. The exposure to interest rate risk arises from the Company’s financial liabilities, i.e. borrowings denominated in the złoty and the euro, which bear interest at variable market interest rates. In 2018, given its operating environment, the Company did not use any financial instruments to hedge against currency risk or interest rate risk. To mitigate currency risk, the Company used natural hedging, i.e. offsetting of income and expenses denominated in a foreign currency to minimise the effect of exchange rate fluctuations on its financial result. To mitigate interest rate risk, all Grupa Azoty Group companies used the same reference rate for PLN-denominated borrowings and financial assets. In 2018, no material exposure was identified requiring entry into transactions to hedge against interest rate risk. Credit risk management

Grupa Azoty Zakłady Chemiczne Police Group Page 47 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

The credit risk management policy applies to and is applied by all of the Company’s divisions and organisational units which enter into commercial or financial transactions. The policy, which lays down the rules for managing risk arising from trade credit granted by the Company, comprises: • risk identification and assessment, • definition of risk management strategy, • selecting risk management measures, • implementing the adopted strategy, • monitoring and evaluating the effects of the measures taken. Receivables insurance agreements In 2018, the insurance of trade receivables arising from sales of fertilizers, pigments, chemicals and potassium chloride was continued. To mitigate the risk associated with deferred payments, the Company takes out insurance policies for its trade receivables. The policies limit credit risk to the deductible amount (5% of the value of insured receivables). The insurance covers sales in three currencies: PLN, EUR and USD (for the foreign currencies, the insurance also covers currency risk arising from trade credit offered to foreign trading partners). As a rule, all deferred payments are insured.

5.11. Expected financial condition Despite strong exposure to developments in the market environment, the Parent as well as the other Group companies are fully solvent, with good credit standing. This means they are able to pay their liabilities as they fall due and to generate and hold free operating cash flows to further support timely payment of such liabilities. In 2018, the Group repaid all its borrowings when due, and there is no threat to the Group’s ability to service its debt. To secure liquidity, the Parent uses external sources of financing. As a Key Company of the Grupa Azoty Group, it is party to umbrella facility agreements to secure funding for day-to-day operations, and to New Financing Agreements, which include long-term agreements for the financing of the Strategy and Development Plan. The Parent and its subsidiaries are participants of a physical cash pooling agreement whereby some companies’ deficits are financed with surpluses generated by other companies. Thus, even if the macroeconomic conditions deteriorate, the risk of losing liquidity remains low. Generation of positive margins on the main products sold both on the domestic market and abroad remains the key factor determining the Parent’s development in 2019, including growth of its financial resources and assets. The Parent intends to consistently pursue the financial and investment objectives formulated in its strategy, designed to ensure that the expected level of return is delivered for its investors.

6. Risk, threats and growth prospects Given the Company’s position within the Group, factors material to the Parent’s growth are the factors which affect the development and growth of the entire Group. Thus, the Group’s risks, threats and growth prospects are analysed chiefly from the perspective of the Parent’s own growth prospects.

6.1. Significant risk factors and threats 6.1.1. Investment project management Risks associated with the planning and execution of strategic projects As drivers of long-term growth, strategic investment projects are among Grupa Azoty’s top priorities. They are mainly focused on developing new products, enhancing the efficiency of existing units, and reducing production costs of key products. In addition, the applicable legal regulations (including the Industrial Emissions Directive) are monitored on an ongoing basis to bring the existing units in line with any new requirements when and as needed. The planning and execution of strategic projects entail multiple risks as well as opportunities. The main risk is associated with failure to complete investment projects according to initial plans and failure to achieve the expected results. The project preparation phase involves the risk of failure to

Grupa Azoty Zakłady Chemiczne Police Group Page 48 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) accurately assess the changing environment. Key projects also carry the risk of selecting unsuitable technologies and units responsible for their execution. If a project is not properly prepared or unexpected circumstances arise, the Company also risks incurring additional capital expenditure during its execution. Risks may also arise from raising the requirements which must be satisfied by contractors/subcontractors, as this may involve higher contract costs and may result in a lower number of potential contractors holding the necessary licences. On the other hand, more stringent requirements may translate into improved OHS standards and higher quality of services provided. The success of strategic projects is contingent on many external and internal factors. The main external factors affecting the Company’s growth opportunities and growth rate include macroeconomic factors, market situation, economic environment, and the activities of main competitors. They could adversely affect the Company’s and the Grupa Azoty Group’s ability to develop its business as planned and to deliver its strategic objectives. They, however, remain largely beyond the Company’s control. Major internal factors and efforts relevant to the Company’s and the Grupa Azoty Group’s growth include the technical condition of production units and organisational preparedness to deliver the investment programme. Possible amendments to EU directives, amendments to OHS, fire protection and building law regulations, or regulations issued by the Polish Office of Technical Inspection (UDT) and the Polish Office of Transport Inspection (TDT), involve the risk of underestimating project budgets and being subject to more stringent requirements for the execution and acceptance of works. At the same time, such amendments provide an opportunity to improve OHS and the quality of projects being delivered. In order to minimise the risks to the execution of strategic projects at the Company and the Grupa Azoty Group, internal procedures have been put in place to define and govern the preparation and execution of investment projects. Specific controls are required for contractors, their credentials and experience, as well as proper and timely performance of work. The internal control system helps to mitigate any mismanagement risk and find opportunities to optimise spending. The planning phase is based on reliable market information sourced from reports of external market research firms, or opinions of technology, economic and market consultants and advisors. Oversight has been introduced over strategic projects, which involves a review of projects’ key assumptions (business effects, budgets, KPIs, schedules, division of responsibilities). Regular projects status updates are provided, and Project Managers are required to prepare monthly and quarterly progress reports. Such reports also cover the risks and threats related to specific projects. A uniform risk assessment methodology for the planning and execution of strategic projects was introduced across the Grupa Azoty Group. The risk assessment procedure involves two aspects of key importance for the implementation of strategic projects: their budgets and completion deadlines. Risk indicators for strategic projects are monitored on a regular basis and reported quarterly. Seven strategic projects were being monitored in 2018. As part of the management of risks associated with strategic project planning and execution, a number of steps are planned to avoid the likelihood of such risks materialising. 6.1.2. Laws, regulations and compliance Risk of implementation/tightening of EU or local regulations which would restrict the use of the Company’s products There is a risk that the Company may incur costs arising from more stringent requirements with respect to the content of heavy metals (such as cadmium or nickel) in its products, as a new fertilizer regulation is expected in H2 2022. The Company may find it difficult to meet such limits; or it may, in extreme cases, fail to ensure acceptable quality parameters of its products (compound fertilizers). More stringent regulations concerning the heavy metal content in fertilizers may force the Company to find new supply sources for raw materials, including phosphate rock and magnesites, which in turn may drive up production costs. To date, no technology for removal of heavy metals (including cadmium from fertilizers) has been developed and commercialised. Laboratory research is carried out and technologies are examined for their feasibility (pilot implementations followed by development of design concepts for selected solutions), which includes evaluation of process effectiveness and assessment of potential capital and operating expenditure requirements of future projects. A transition to fertilizer production processes which would meet the requirements may make the products less competitive and may adversely affect sales due to higher production costs.

Grupa Azoty Zakłady Chemiczne Police Group Page 49 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Like the other Polish manufacturers of phosphate fertilizers and most European fertilizer producers, the Grupa Azoty Group proposed that a cadmium (Cd) content limit in fertilizers be set at 80 mg per kilogram of P2O5, which would not increase the cadmium content in soil, but could help the industry avoid significant market consequences. As a result of the ‘trialogue’ between the European Commission, the European Parliament and the EU Council, in December 2018 a compromise was reached, setting the cadmium content limit at 60 mg Cd/P2O5. The limit is to start applying three years after the regulation comes into force. Together with the limit, requirements were specified with respect to a mandatory review to be performed by the European Commission four years after the cadmium limit effective date (3+4 = 7 years). The review is to provide an assessment of the market after the regulation is implemented. Another aspect accompanying the proposed cadmium content limit at 60 mg Cd/P2O5 is the proposal that fertilizers with less than 20 mg Cd/P2O5 receive the so-called ‘green label’. Similarly, a national derogation was provided for in the compromise allowing member states to maintain stricter limits on cadmium content in fertilizers (less than 60 mg Cd/P2O5). The compromise on cadmium content was approved by representatives of the Internal Market Committee (IMCO) of the European Parliament on January 22nd 2019. On March 27th 2019, the European Parliament passed the New Fertilizer Regulation. As the next step, the document must be endorsed by the EU Council in order to be published in the Official Journal of the EU. This is likely to happen at the end of May 2019. The Company actively participates in the legislative work on the draft new Fertilizer Regulation. Support and lobbying activities are coordinated at key events within EU institutions. The Company is searching for viable technical and technological alternatives in anticipation of the introduction of pollutant (including cadmium) content limits for fertilizers and is developing technologies for removing heavy metals from production streams. It also reviewing its product portfolio in the context of the legislative requirements, taking into account products’ market attractiveness and production costs.

Risk of a negative effect of CO2 emissions trading prices on financial results

Measures taken to reduce the risk of a negative effect of CO2 trading prices on the Company’s results consist in continuous monitoring of the emission allowances market and purchase of emission allowances on the spot market when prices are favourable. In addition, a part of future emission allowances are acquired with the use of futures contracts, i.e. purchase of emission allowances in the form of derivative financial instruments that give rise to an obligation to deliver allowances on future dates when they should be redeemed, in accordance with the current purchase strategy.

As part of the Grupa Azoty Group’s joint management of CO2 emission allowances, the Company has implemented:

• joint model for managing CO2 emission allowances applicable across the Grupa Azoty Group, • CO2 Emission Allowances Management Policy for the Grupa Azoty Group.

In line with the CO2 Emission Allowances Management Policy, the Company has introduced:

• CO2 Emission Allowances Procurement Planning Procedure for the Grupa Azoty Group, • CO2 Emission Allowances Procurement Procedure for the Grupa Azoty Group.

The policies and procedures are designed to enhance trading in CO2 emission allowances and ensure its efficiency, optimise the costs of operation of the EU Emissions Trading Scheme (EU ETS) and minimise risks associated with participation in the scheme.

6.1.3. Management of fixed production assets Risk of major industrial accidents or technical failures resulting in disruption of operations and stoppage of key production units Given the nature of its business, the Company’s priority is to observe the most stringent safety standards to mitigate the risk of industrial accidents. The identified risks that may be key to the Company’s ability to pursue its business objectives are monitored on an ongoing basis. The risk of a potential accident may emerge from: events caused by an improperly conducted production process, faulty technical maintenance, technical condition of production units or incorrect methods of assessing the technical condition (technical condition assessment which does not comprehensively addresses specific conditions of manning and operating technical facilities).

Grupa Azoty Zakłady Chemiczne Police Group Page 50 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

The risk may also be posed by random events (hidden defects in materials or technology). On the other hand, an opportunity is provided by broadening the range of diagnostic methods and non-destructive testing, as well as by the introduction of additional measuring tools. The Company is classified as an establishment with a high risk of a major industrial accident (upper- tier establishment — UTE). The Company has developed and introduced mandatory programmes to prevent such accidents, and regularly monitors and implements legal requirements relating to safety, including the requirements of the Seveso III Directive transposed into Polish legislation. The Company has in place technical and organisational measures to prevent industrial accidents and contain their consequences. and mitigation of its effects. The well-trained Company Fire Brigade, with additional support from chemical rescue teams and other services, is capable of undertaking effective rescue operations in any situation. The correctness of work safety solutions in place at the Company is assessed by external inspection authorities and accreditation/certification bodies. The Company’s due care for safety is evidenced by the certificates it holds. Control mechanisms are implemented and used in the form of internal procedures, service contracts, monitoring systems, and protection of devices and units against exceeding the permissible parameter values. Such organisational and technical measures allow the Company to maintain high safety standards and consistently reduce its environmental footprint. The Company’s efforts to improve working conditions, Company-wide work safety campaigns and the free disease prevention programme offered to employees have been recognised by external institutions − for instance, in 2018 the Company once again received the Gold Card Leader on Safety at Work Award (2019–2020). The Company’s units are equipped with a range of process interlocks and interlocks supervised by the Technical Inspection Office that prevent accidents and ensure operational and equipment safety in the event of disruption of operations. TPL (Total Preventive Maintenance) programmes and modern Preventive Maintenance programmes, supported by the CMMS system and plant maintenance management, significantly enhance the technical condition and reliability of production units, thereby minimising the risk of accidents.

Our strategy of industrial accident and technical failure risk management is primarily focused on mitigating the risk of any critical situation occurring, but also provides for the apportionment of its consequences between insurers should any risk materialise. In line with the applied internal procedure, each failure is followed by activities specified in reports prepared by emergency committees or in corrective/preventive action plans. No serious industrial accidents occurred at the Company in 2018. 6.1.4. Technical safety Risk associated with new legal requirements relating to production processes Any change in environmental regulations will require unit operators to adapt their units to the new legal requirements and incur related costs. Possible threats also include: the introduction of new regulatory requirements that are not correlated with investment plans and financing capacities, the risk of a failure to adapt units to the announced BAT conclusions, a failure to meet the permissible emission limits or the risk of legal changes resulting in an increase in environmental fees. The Company holds a valid integrated permit. In connection with the Marshal Office’s review of the permit, related to the announcement of the BAT conclusions for large combustion plants, the Company was called to apply for amendment to the permit. By the required deadline, the Company filed an application to harmonise the permit with European Commission Implementing Decision (EU) 2017/1442 of July 31st 2017 establishing conclusions concerning the best available technologies (BAT) for large combustion plants in accordance with Directive 2010/75/EU of the European Parliament and of the Council (“LCP Conclusions”). The law obliges the Company to ensure full compliance with the requirements of the conclusions by August 2021. Having analysed the possibility of applying for a derogation from the emission limits, the Company took the necessary steps. The Company is actively involved in consultations of draft legislation. It has submitted comments on and suggested amendments to the draft waste act and its secondary legislation with respect to: • loss of the status of by-products,

Grupa Azoty Zakłady Chemiczne Police Group Page 51 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

• monitoring of waste storage and landfill sites, • securing waste storage claims. The Company has repeatedly emphasised that it may be exposed to inordinately high costs of the proposed regulations concerning video monitoring of waste landfill and storage sites, as well as provision of security for claims and problems relating to the risk of delay in obtaining a decision on the recognition of iron (II) sulfate, ash and slag as by-products (failure to obtain a new decision by the prescribed date may make it impossible to sell the products to customers that do not hold relevant decisions).

Risk of failure to meet deadlines for required reduction of NO2, SOx and particulate matter emissions The applicable law requires that the Company complies with stricter emission standards for fuel combusting units. The standards apply to sulfur dioxide, nitric oxides and particulate matter emission limits. The IED Directive and the Environmental Protection Law provide for postponing the effective date of the more restrictive emissions standards. One such mechanism is the Transitional National Plan (TNP). The Group’s fuel combustion sources, including the CHP II plant have been submitted for inclusion in the TNP. According to the TNP derogatory mechanism for combustion sources of the CHP II plant, from January 1st 2016 to June 30th 2020 the emission limits “are calculated for each year as a moving average”. Measures to reduce NO2, SOx and particulate matter emissions are intended to mitigate particular risks or, should they materialise, to minimise their negative consequences. New emission standards for particulate matter are also applicable to the CHP I plant. Following the publication in 2017 of the BAT conclusions for large combustion plants (LCPs), which introduce stricter emission standards and further restrictions, the Company, in order to be compliant, must take adaptive measures to meet the standards specified in the BAT conclusions. If the requirements are not met, environmental penalties may be imposed on the Company by an external body. Action could be taken to obtain a derogation by extending the period of adaptation to the stricter emission limits set in the BAT conclusions for LCPs beyond the statutory four-year deadline. Such a derogation may be granted because the costs of complying with the emission limits are disproportionate to the environmental benefits. To ensure compliance with the regulations, the Company has taken risk management measures including a number of control mechanisms, such as internal procedures, technological and workplace- specific instructions, continuous monitoring of emissions, internal control, training, and execution of projects to adapt process units to the new legal requirements. In order to limit the risk of excess emissions, an investment project was carried out at the CHP II plant to reduce NO2 , SOx and particulate matter emissions (FGD project). In May 2018, the flue gas desulfurisation units were placed in regular service. In 2018, the emission limits were met. The risk management process includes ongoing monitoring and monthly reporting of data related to the continuous operation of the FGD units and percentage share (monthly/annual) of SO2 emissions in the limits set in the TNP. 6.1.5. Comprehensive customer support Risk of higher fertilizers imports The Company’s market position and its competitiveness largely depend on conditions prevailing on the fertilizer market, Which need to be closely monitored and require taking legislative as well as lobbying initiatives. Imports of NP and NPK compound fertilizers to Poland (mainly from the East) have been growing in recent years. This situation has not caused any reduction of the Company’s output so far, but it poses a threat to fertilizers’ logistics. There is a risk of further growth of imports and oversupply of products on the market. Access to cheap gas and no obligation to comply with the EU environmental regulations and standards give an additional advantage to fertilizer manufacturers from the East. The Company would benefit from the introduction of legal and customs regulations applicable to imported fertilizers, which would ensure fair market competition. Stricter procedures for admission of imported fertilizers to trading on the market would also be welcome. Development of speciality fertilizer formulations, expanding the product range to include products targeted at the most demanding customer groups might provide another opportunity for the Company.

Grupa Azoty Zakłady Chemiczne Police Group Page 52 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Measures taken by the Company to strengthen its competitive advantages in the fertilizers segment: • implementation of the Group’s updated distribution strategy, • implementation of projects designed to improve the efficiency of production processes, • strengthening the Group’s market position through acquisitions and placement of new products in the market, • taking active part in the consolidation of the chemical industry, • initiating anti-dumping proceedings, • active participation in the work of Fertilizers Europe, • cooperation with universities and research institutes, • performing laboratory tests to develop coated as well as organic and mineral fertilizers, • supporting agricultural producers by providing them with access to state-of-the-art fertilizing and production solutions. • offering comprehensive agrotechnical consultancy services, • implementing a series of educational programmes devoted to fertilizer application, • conducting regular surveys to gauge farmers’ awareness of fertilizer brands and their purchasing practices. Risk of deteriorated supply-demand balance For years, the Company has been operating in a demanding and changeable competitive environment dependent on business cycles, frequently facing an unfavourable demand-supply relationship, and prices of the fertilizers it manufactures strongly depend on the supply and demand on local and international markets. The market of titanium white is subject to similar patterns. Some of the Company’s competitors may have access to newer technologies or cheaper raw materials, or – thanks to their more favourable geographical location – may have better access to raw materials and target markets. Some manufacturers from the Company’s immediate environment, including Polish manufacturers, plan to increase their production capacities. Because of these factors, the prices of and demand for the Company’s products fluctuate. The risks related to fertilizer production include the following factors: • demand-supply imbalance caused by lower consumption of products (changeable weather conditions, delayed disbursements of direct payments, market saturation and oversupply of products),

• lower volumes of purchases by customers who need to scale down their own output and cope with uncertainties surrounding their ability to sell their own products, • delays in disbursements of direct payments to farmers, • natural disasters, droughts, floods, or frosts leading to lower purchases of fertilizers. The key risks related to titanium white include: • seasonal drop in demand for titanium white from manufacturers of paints and varnishes, • increased quality requirements concerning the use of titanium white in the plastics and paper industries,

• increased activity of manufacturers and exporters of titanium white from outside Europe.

The global titanium white shortages persisting until the first half of 2018 were offset mainly by Chinese imports, which provided a cheaper alternative to customers who do not require high quality products. In the last quarter of 2018, market research reports began to show that the world’s economies, including Germany, were slowly losing momentum. Germany is Poland’s largest export destination. A deteriorating economic and political situation in global markets is bound to harm consumption in the long term. To consolidate its market position, the Company is seeking to increase sales on both the domestic and export markets by trying to reach new, smaller customers, focusing more on strategic markets, and looking for new sales markets, also outside Europe. Measures taken by the Company to strengthen its competitive advantages on the fertilizer market include investments and development projects to develop new fertilizer formulas which could be used in agricultural engineering, and to improve the efficiency and flexibility of production processes. The Company is also diversifying its sales markets and customer base.

Grupa Azoty Zakłady Chemiczne Police Group Page 53 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Risk related to customers’ growing quality and environmental requirements Growing customer expectations and the need to comply with the EU environmental regulations and standards have a bearing on the Company’s business. The uncertainty risk relates to: • tightening of EU laws pertaining to heavy metal content, restricting the use of the Company’s products by customers in the EU countries, • restrictions on the quantity of fertilizers used per hectare, • introduction/application of restrictions on the quantity of components in products following the amendments to the relevant regulation, • liberalisation of trade in the EU, • meeting fertilizer granulation requirements, • risk of slowing demand from end customers (the cement industry) for iron sulfate in the form offered by the Company as demand for the product in the granular form grows.

The Company monitors changes in all types of legal regulations the tightening of which may lead to the limitation of product sales, and coordinates support and lobbying activities at EU institutions. It also works with other manufacturers in order to develop a strong, common position with regard to proposed restrictions. Examples include cooperation with the AEEP (over the new fertilizer regulation) and other producers (with respect to classification of titanium white as a potential carcinogen). Efforts are taken to support the fertilizer and titanium white application. The Company also partners with research and higher education institutions as well as businesses to develop or purchase technologies for removing impurities from phosphoric acid. For years, the Company has been engaged in applied science projects, which result in new or improved products. Risk of loss of business volumes due to the bankruptcy of a key customer The Company consistently implements measures aimed at mitigating the risk of losing key customers, focused on improving product quality and customising its products. In addition to providing application support to key customers, the risk is mitigated by research and development activities which improve the quality of the Company’s product portfolio. The Company regularly undertakes surveys to measure customer satisfaction with the quality of its services, covering the areas of customer service, products, receiving process, terms of business, and complaint handling. If the risk materialises, possible threats include the loss of target revenue, as well as difficulties in forging new business relations and finding new markets for the Company’s products. Opportunities could include the development of its own distribution network based on the Grupa Azoty Group companies.

6.2. Grupa Azoty Group’s significant external and internal growth factors 6.2.1. External factors Market factors The strongest drivers of the Company’s situation are those related to market prices of the Company’s products and purchase prices of raw materials/feedstocks with the greatest effect on production costs, including mainly natural gas, phosphate rock, and potassium chloride. The relationship between market prices of products and prices of the key feedstocks has a bearing on the Company’s competitive position and profitability. External material drivers of the demand for fertilizers include the macroeconomic climate for the agricultural sector and farmers’ incomes. The situation in agricultural is largely affected by the relationship between prices of agricultural produce and prices of means of agricultural production. The Company’s results also depend on conditions prevailing in the main sectors which purchase the Company’s products and on the markets where those sectors sell their products. Legislative changes The Company’s development directions depend on legislative regulations, primarily those implemented by the European Union as European countries are a strategic market for the Company. Legislative changes would affect the Company’s business in two ways. On the one hand, the need for compliance would determine changes and solutions implemented by the Company. On the other hand, legal regulations binding on the Company’s customers and users of its products would affect demand.

Grupa Azoty Zakłady Chemiczne Police Group Page 54 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Given the major share of the Fertilizers Segment in the Company’s revenue, all developments in the agricultural market translating into demand changes have a significant effect on the Company’s market situation, development (changes in product mix) and sales (sales policy and structure). Work is nearing completion to enact the new EU fertilizer regulation, which would apply in all EU member states. The document envisages harmonisation of the fertilizer market and permits marketing of all types of fertilizer products, which would significantly affect the competitiveness of mineral fertilizers supplied by the Company. The new regulation would impose more stringent limits for the content of cadmium and other contaminants in phosphate and compound fertilizers. At the present stage of work, as part of the trialogue between the European Commission, the European Parliament and the EU Council, discussions are being held to reach a final agreement on the target limits for the content of cadmium in fertilizers and transitional periods leading to their full implementation, including a transitional period for taking adaptive measures to allow manufacturers to meet the new requirements. The Company is engaged in a number of R&D and operational projects to ensure that its marketed products meet all legal requirements. Any change in environmental regulations would require unit operators to adapt their process units to the new emission standards. The legislative changes currently under way will in the coming years have a major impact on the Company’s competitive position and its operation in the market reality. 6.2.2. Internal factors Liquidity and debt Ability to earn positive margins on the main products marketed both on the domestic and international markets remains the key factor which has a bearing on the Company’s current liquidity in the long- term. The Company operates an active cash flow (payables and receivables) management policy by using trade credit and advance payment in the settlement of sale transactions, extending payment terms in purchase transactions, and insuring its trade receivables. The Company manages its liquidity by maintaining credit facilities appropriate for the scale of its business, which constitute a liquidity reserve minimising the risk of potential effects of delayed payment of liabilities. In 2018, the Company repaid all its borrowings when due, and there is no threat to the Company’s ability to service its debt. The Company keeps monitoring the level of its debt to be able to implement debt optimisation measures. The National Bank of Poland’s interest rates remained unchanged in 2018, which helped to stabilise borrowing costs and safely service debt. Intensification of sales Apart from the achievement of marketing objectives, another important function of the sales policy is to maximise the Company’s sale volumes through full optimisation of the available production capacities. Given the scale and flexibility of it production processes, the Company can keep production costs down to a minimum and thus offer competitive prices compared with other manufacturers having direct access to most raw materials. Sales intensification measures focus primarily on maximising sales volumes in the most profitable markets. By adapting contract terms to current demand and competition, the Company strives to offset the effects of seasonal fluctuations in sales volumes typical of the Company’s main product markets of titanium white and mineral fertilizers. In its strategic markets, the Company stimulates the growth of sales volumes using incentive schemes and other marketing tools. Quality The Company’s products are manufactured using globally recognised technologies and the final quality of its products meets the requirements of the Company’s customers on target markets. The Company constantly improves production efficiency through the introduction of state-of-the-art systems supporting proper process monitoring and control. The Company holds Quality, Environment and Security Management System Certificates, which guarantee stable quality of its products. The development of new production technologies has enabled the Company to expand its product offering to include new types of fertilizers which help find customers on global markets that previously were beyond the Company’s reach. The following brands owned by the Company are well-known and recognised on the market as symbols of high quality: • POLIFOSKA® − the leading brand on the Polish market of compound NPK fertilizers. The POLIFOSKA® brand has become a synonym of compound fertilizers in Poland. POLIFOSKA is the

Grupa Azoty Zakłady Chemiczne Police Group Page 55 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

umbrella brand of fertilizer products with varying chemical compositions and application properties, featuring a high concentration of pure constituents, chemical uniformity of fertilizer grains, high assimilability of constituents, optimal granulation and application characteristics, as well as a favourable price per nutrient equivalent; • Apart from POLIFOSKA®, the Company also offers a diammonium phosphate (NP 18-46) fertilizer marketed as POLIDAP®; • TYTANPOL® brand – the Company is the only manufacturer and largest supplier of titanium pigments on the Polish market. TYTANPOL® titanium white produced by the Company is well known for its high pigmentation properties. All varieties of titanium white offered by the Company are of high quality, feature high opacifying and brightening properties, and are stable, easily dispersible, intercompatible and non-toxic.

7. Equity and other securities and its major shareholders 7.1. Total number and par value of Company shares, holdings of Company shares by supervisory and management personnel, and interests of such persons in the Company’s related entities Number and par value of Company shares: • 60,000,000 Series A shares with a par value of PLN 10 per share, • 15,000,000 Series B shares with a par value of PLN 10 per share, The total number of Company shares is 75,000,000 ordinary bearer shares (code PLZCPLC00036). Table 42.Shares held by management personnel Number of shares / voting rights As at As at As at

Jan 1 2018 Dec 31 2018 this report date Wojciech Wardacki, Ph.D. - - - Włodzimierz Zasadzki, Ph.D. - - - Tomasz Panas - - - Anna Tarocińska 1 1 1

As at the end of the reporting period (December 31st 2018) and the date of this report, none of the members of the Parent’s Supervisory Board held any shares in the Parent’s share capital. As at the date of this report, none of the Parent’s supervisory or management personnel held any shares in the Parent’s related parties.

7.2. Treasury shares held by the Parent, Group companies and persons acting on their behalf The Parent holds no treasury shares. The Group companies hold no treasury shares,

7.3. Shares of the Parent The Company shares were listed on the Warsaw Stock Exchange for the first time on July 14th 2005. The shares (ticker: PCE) are listed on the WSE main market in the continuous trading system and are included in the WIG and sWIG80 indices and the chemical sector index, WIG-Chemia. Share performance The Company stock price started 2018 at PLN 20.90, which turned out to be the highest price for the year. Throughout the first quarter, the price was stable within the PLN 19.25−20.60 range. In the first half of the second quarter of 2018, the price continued at the first-quarter level, but fell to PLN 17.25 in the second half of the second quarter. In the first month of the third quarter of 2018, the share price continued in a downtrend, falling to PLN 16.50 at the month’s end. The priced edged up to PLN 19.00 in the second month of the third quarter, but receded again in the third month, to PLN 16.75. From the end of September to the beginning of November, the share price experienced steep declines,

Grupa Azoty Zakłady Chemiczne Police Group Page 56 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) reaching a 2018 low of PLN 12.00 on November 2nd. The last month of the fourth quarter saw a rebound in the share price, lifting the year-end price to PLN 13.50. Table 43. Share price of the Parent Details Unit 2018 Number of shares shares 75,000,000 Year-end market capitalisation PLNm 1,012.5 Average trading volume per session shares 806 Trading value PLNm 3.34 Closing price high PLN 20.90 Closing price low PLN 12.00

Figure 14. Share performance and trading volumes in 2018 25,00 30 000 20,00 25 000 20 000 15,00 15 000 10,00 10 000 5,00 5 000 0,00 0 01 2018 02 201803 2018 04 2018 05 2018 06 2018 07 2018 08 2018 09 2018 10 2018 11 2018 12 2018

Wolumen (oś prawa) Kurs akcji (oś lewa)

Volume (right axis) Wolumen (oś prawa)

Share price (left axis) Kurs akcji (oś lewa)

Dividend policy In line with the Strategy of the Grupa Azoty Group for 2013–2020, which was updated in 2017, the guiding principle behind the dividend policy is to make payments proportionate to the Company’s earnings and financial condition. The General Meeting is recommended to resolve on dividend payments representing up to 60% of the Company’s separate net profit for a given financial year. The main goal underpinning the Group’s financing structure is to ensure long-term financial security and internal coherence between all funding sources. Given the extensive capital investment programme in place and the risk of an economic downturn, no floor has been set for the dividend payout ratio. Accordingly, if justified, the Management Board will not recommend a dividend payment. Decisions on dividend payments are made with consideration given to a range of factors concerning the Group, and this includes prospects for its further operations and earnings, cash requirement, financial position, expansion plans and related legal requirements. Recommendations Table 44. Recommendations concerning the Parent shares between January 1st 2018 and the date of this report Price on Recommend Target price recommend Date Broker ation (PLN) ation date (PLN) Feb 28 2019 reduce PLN 14.80 PLN 17.00 DM BDM SA Feb 13 2019 buy PLN 18.80 PLN 15.50 DM BOŚ SA Oct 07 2018 sell PLN 11.00 PLN 16.50 DM BOŚ SA Sep 24 2018 reduce PLN 15.30 PLN 16.70 DM BDM S.A.

Grupa Azoty Zakłady Chemiczne Police Group Page 57 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Jul 09 2018 hold PLN 15.30 PLN 16.20 DM BOŚ SA May 17 2018 sell PLN 15.80 PLN 19.20 DM BOŚ SA Apr 25 2018 sell PLN 17.30 PLN 19.40 DM BOŚ SA Feb 14 2018 hold PLN 19.70 PLN 19.80 DM BDM SA Jan 23 2018 sell PLN 15.40 PLN 19.90 DM BOŚ SA

Investor relations Acting in accordance with the highest standards of capital market communication and corporate governance, the Company provided all market participants, and particularly current and prospective shareholders, with exhaustive and reliable information on developments taking place at the Company. The corporate website is a key tool for communication with the capital market, and features the Parent’s current and periodic reports, important information about AGMs and EGMs, analyst recommendations and financial results.

8. Statement of compliance with corporate governance standards Acting pursuant to Section 29.5 of the WSE Rules and Resolution No. 1013/2007 of the Management Board of the Warsaw Stock Exchange, the Management Board hereby publishes a report on the Parent’s compliance with the set of corporate governance rules laid down in the “Best Practice for WSE Listed Companies 2016” in 2018.

8.1. Corporate governance code applicable to the Parent and the place where the text of the code is available to the public Observing the highest standards of communication on the capital market and corporate governance principles, in 2018 the Company complied with the ‘Best Practice for WSE Listed Companies 2016’ issued by the Warsaw Stock Exchange. The code effective in 2018 was published as an appendix to Resolution No. 19/1307/2012 of the WSE Supervisory Board, dated November 21st 2012. Following the adoption by the WSE Supervisory Board of Resolution No. 26/1413/2015 of October 13th 2015 approving the new ‘Best Practice for WSE Listed Companies 2016’, the Company states that it complies, as of January 1st 2016, with the recommendations and principles laid down in the new code, published on the WSE’s and the Company’s websites. The Company complies with the recommendations and principles set out in the Code of Best Practice, except for the following: IV.R.2. If justified by the structure of shareholders or expectations of shareholders notified to the company, and if the company is in a position to provide the technical infrastructure necessary for a general meeting to proceed efficiently using electronic communication means, the company should enable its shareholders to participate in a general meeting using such means, in particular through: • real-life broadcast of general meetings, • real-time bilateral communication where shareholders may take the floor during a general meeting from a location other than the general meeting, • exercise of the right to vote during a general meeting either in person or through a proxy.

Explanation: Neither the Company’s Articles of Association nor the Rules of Procedure for the General Meeting provide for real-time broadcast of General Meetings. The Company believes that the documentation and proceedings of the General Meetings held to date guarantee transparency of the Company and protection of the rights of all shareholders. Information on passed resolutions is published by the Company in the form of current reports on its website. Therefore, investors are able to review the matters discussed at General Meetings. However, the Company may apply this principle in the future. The Management Board believes that non-compliance with this recommendation will not adversely affect the reliability of the Company’s information policy and does not pose a risk of limiting or impeding shareholders’ participation in General Meetings. I.Z.1.20

Grupa Azoty Zakłady Chemiczne Police Group Page 58 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

A company should operate a corporate website and publish on it, in a legible form and in a separate section, in addition to information required under the legislation, an audio or video recording of a general meeting.

Explanation: In the Company’s view, the way General Meetings have been documented and carried out to date ensures transparency and safeguards the rights of all shareholders. Further, information on passed resolutions is published by the Company in the form of current reports, also on its website. Therefore, investors are able to review the matters discussed at General Meetings. The Company may apply this principle in the future. In the opinion of the Company’s Management Board, the decision not to apply the abovementioned principle will not affect the reliability of the Company’s information policy, nor will it hinder shareholders’ participation in General Meetings. IV.Z.2. If justified by the shareholding structure, a company should ensure publicly available real-time broadcasts of general meetings.

Explanation: Neither the Company’s Articles of Association nor the Rules of Procedure for the General Meeting provide for real-time broadcast of General Meetings. The Company believes that the documentation and proceedings of the General Meetings held to date guarantee transparency of the Company and protection of the rights of all shareholders. Moreover, the Company publishes information on resolutions in the form of current reports and on its website. Thus investors are able to familiarise themselves with the matters discussed by the General Meeting. However, the Company may apply this principle in the future. In the opinion of the Company’s Management Board, the decision not to apply the abovementioned principle will not affect the reliability of the Company’s information policy, nor will it hinder shareholders’ participation in General Meetings.

8.2. Declaration of applying the recommendations contained in the ‘Best Practice for WSE Listed Companies 2016’ I. Disclosure Policy, Investor Communications I.R.1. Where a company becomes aware that untrue information is disseminated in the media, which significantly affects its evaluation, it should immediately publish on its website a communiqué containing its position on such information, unless in the opinion of the company the nature of such information and the circumstances of its publication give reasons to follow a more adequate solution.

The Company declares to make every effort to prevent any damage that may be caused by disseminating untrue information about it. The Company seeks to ensure transparency by responding effectively to untrue information and limiting the negative effects of its dissemination. The Company takes care to provide its shareholders and the market with a true and accurate picture of Grupa Azoty Police. The Company keeps track of how it is covered in electronic media and selected press titles. I.R.2. Where a company pursues sponsorship, charity or other similar activities, it should publish information about the relevant policy in its annual activity report.

The Company pursues transparent sponsorship, charity and other similar activities. The Company’s sponsorship policy is implemented in line with the Communication Procedure of November 23rd 2016, supplemented by sponsorship policy regulations on October 30th 2018. I.R.3. Companies should allow investors and analysts to ask questions and receive explanations – subject to prohibitions defined in the applicable legislation – on topics of their interest. This recommendation may be implemented through open meetings with investors and analysts or in other formats allowed by a company.

Grupa Azoty Zakłady Chemiczne Police Group Page 59 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

The Company, pursuing an open information policy, provides all market participants, in particular current and prospective shareholders, with exhaustive and reliable information on events taking place at the Company and the Group. I.R.4. Companies should use best efforts, including taking all steps well in advance as necessary to prepare a periodic report, to allow investors to review their financial results as soon as possible after the end of a reporting period.

The Company takes all necessary steps to prepare periodic reports well in advance. This report, as well as all the 2018 periodic reports, were published before the respective deadlines set by the legislator. II. Management Board, Supervisory Board II.R.1. To ensure the highest standards of the management board and the supervisory board of a company in efficient fulfilment of their obligations, the management board and the supervisory board should have members who represent high qualifications and experience.

In 2018, the Management Board and the Supervisory Board were composed of persons holding university degrees in law, economics, chemical engineering, as well as accounting. In addition, most of them have completed postgraduate studies, e.g. in project management, postgraduate MBA programmes or specialist courses and training. II.R.2. Decisions to elect members of the management board or the supervisory board of a company should ensure that the composition of these bodies is comprehensive and diverse among others in terms of gender, education, age and professional experience.

Pursuant to Art. 20.3 of the Company’s Articles of Association, a Management Board member should have a university degree and at least three years of professional experience in a managerial position. Given their vast competences and professional experience, including experience in serving on supervisory bodies of chemical or financial companies, members of the Management Board and Supervisory Board manage and supervise the Company’s operations properly and to a sufficient degree. II.R.3. Serving on the management board of a company should be the main area of the professional activity of management board members. Additional professional activities of management board members must not require such amounts of time and effort as would adversely affect the proper performance of the members’ duties and responsibilities at the company. In particular, management board members should not serve in governing bodies of other entities if the time devoted to such service were to prevent the proper performance of their duties and responsibilities at the company.

Some members of the Company’s Management Board have additional functions at parent entities. II.R.4. Supervisory board members must be able to devote the time necessary to perform their duties.

The Supervisory Board exercises ongoing supervision of the Company’s operations in each area of its activity. Pursuant to Art. 34.1 of the Company’s Articles of Association, the Supervisory Board meetings are held at least once every two months. In 2018, the Supervisory Board met 19 times and held 7 votes by written ballot. II.R.5. If a supervisory board member resigns or is unable to perform his or her duties, the company should immediately take steps necessary to ensure substitution or replacement on the supervisory board.

If there is a threat that resignation or inability to perform his or her duties by a member of the Supervisory Board may result in a vacancy on the Board, the Company declares to take necessary

Grupa Azoty Zakłady Chemiczne Police Group Page 60 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) steps to fill such vacancy. In the event of any temporary vacancy on the Supervisory Board, the Company will report such circumstance as a breach of the principle. Some of the Supervisory Board members are elected by the Company employees, pursuant to Art. 14 of the Act on Commercialisation and Privatisation. II.R.6. Being aware of the pending expiration of the term of office of management board members and their plans of further performance of duties on the management board, the supervisory board should take steps in advance to ensure efficient operation of the company’s management board.

The Company declares to apply this recommendation by ensuring continued operation of the Management Board, and by taking steps, sufficiently in advance, to ensure appropriate operation of the Company. II.R.7. A company should allow its supervisory board to use professional and independent advisory services necessary for the supervisory board to exercise effective supervision in the company. In its selection of the advisory service provider, the supervisory board should take into account the financial condition of the company.

Should the need arise, the Company declares to allow its Supervisory Board to use professional and independent advisory services necessary for the Board to exercise effective supervision. In its selection of the advisory services provider, the Supervisory Board will take into account the financial condition of the Company. III. Internal systems and functions III.R.1. The company’s structure should include separate units responsible for the performance of tasks within its systems or functions, unless the separation of such units is not justified by the size or type of the company’s activity.

The Company’s structure includes separate units responsible for the performance of tasks within its systems or functions. The Company’s Management Board is responsible for the implementation, maintenance, and efficiency of internal control, risk management, and compliance systems, as well as internal audit function as recommended by good practices. Persons responsible for the operation of organisational units performing tasks related to the above systems and functions report directly to the President of the Management Board or to a designated member of the Management Board. The Company has in place an audit committee.

The Company’s organisational chart is presented in Section 2.1. of this report. IV. General Meeting, Shareholder Relations IV.R.1. Companies should strive to hold an ordinary general meeting as soon as possible after the publication of an annual report and set the date in keeping with the applicable legislation.

The Company convenes a General Meeting and sets its date in keeping with the applicable legislation, striving to hold it as soon as possible after issuing a full-year report. In 2018, the Company convened the Annual General Meeting for June 4th 2018. IV.R.2. If justified by the structure of shareholders or expectations of shareholders notified to the company, and if the company is in a position to provide the technical infrastructure necessary for a general meeting to proceed efficiently using electronic communication means, the company should enable its shareholders to participate in a general meeting using such means, in particular through: 1) real-life broadcast of general meetings, 2) real-time bilateral communication where shareholders may take the floor during a general meeting from a location other than the general meeting, 3) exercise of the right to vote during a general meeting either in person or through a proxy.

Grupa Azoty Zakłady Chemiczne Police Group Page 61 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

The Company does not apply the above recommendation. Neither the Company’s Articles of Association nor the Rules of Procedure for the General Meeting provide for real-time broadcast of General Meetings. The Company believes that the documentation and proceedings of the General Meetings held to date guarantee transparency of the Company and protection of the rights of all shareholders. Moreover, the Company publishes information on resolutions in the form of current reports and on its website. Therefore, investors are able to review the matters discussed at General Meetings. However, the Company may apply this principle in the future. In the opinion of the Company’s Management Board, the decision not to apply the abovementioned principle will not affect the reliability of the Company’s information policy, nor will it hinder shareholders’ participation in General Meetings. IV.R.3. Where securities issued by a company are traded in different countries (or in different markets) and in different legal systems, the company should strive to ensure that corporate events related to the acquisition of rights by shareholders take place on the same dates in all the countries where such securities are traded.

This recommendation does not apply to the Company. The Company shares are listed only on the main market of the Warsaw Stock Exchange. V. Conflict of Interest, Related Party Transactions V.R.1. Members of the management board and the supervisory board should refrain from professional or other activities which might cause a conflict of interest or adversely affect their reputation as members of the governing bodies of the company, and where a conflict of interest arises, immediately disclose it.

Members of the Management Board and the Supervisory Board have commited to refraining from professional or other activities which might cause a conflict of interest. If a conflict of interest arises, the involved member of the Management Board or the Supervisory Board is obliged to inform the Management Board or the Supervisory Board, as appropriate, of the existing or potential conflict of interest and to abstain from voting on resolutions concerning matters which might involve this member in a conflict of interest. Any conflicts of interest are immediately and thoroughly investigated. VI. Remuneration VI.R.1. The remuneration of members of the company’s governing bodies and key managers should follow the approved remuneration policy.

The remuneration of members of the Company’s governing bodies and key managers follows the Company’s remuneration policy. For details of the Company’s remuneration policy, see Section 8.14 of this report. VI.R.2. The remuneration policy should be closely tied to the company’s strategy, its short- and long-term goals, long-term interests and results, taking into account solutions necessary to avoid discrimination on whatever grounds.

The Company’s remuneration policy is closely tied to the Company’s strategy, its goals, interests, and results. For details of the Company’s remuneration policy, see Section 8.14 of this report. VI.R.3. If the supervisory board has a remuneration committee, principle II.Z.7 applies to its operations.

This recommendation does not apply to the Company. The Company’s Supervisory Board has no remuneration committee. VI.R.4.

Grupa Azoty Zakłady Chemiczne Police Group Page 62 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

The remuneration of members of the management board and the supervisory board and key managers should be sufficient to attract, retain and motivate persons with skills necessary for proper management and supervision of the company. Remuneration should be adequate to the scope of tasks delegated to individuals, taking into account additional duties, for instance on supervisory board committees.

The remuneration of members of the Company’s Management Board, Supervisory Board, and key managers is sufficient to attract, retain and motivate persons with skills necessary for proper management and supervision of the Company, and the remuneration is adequate to the scope of tasks delegated to those individuals. For detailed rules of remuneration of the Management Board members, see Section 8.14 of this report. For detailed rules of remuneration of the Supervisory Board members, see Section 8.14 of this report.

8.3. Internal control and risk management systems In November 2009, the Supervisory Board established an Audit Committee in order to improve the efficiency of the Board’s work and to strengthen control over the Parent and the Group. The Audit Committee is an advisory body acting collectively within the Supervisory Board. The key areas monitored by the Audit Committee are the financial reporting processes and effectiveness of the internal financial control, internal audit and risk management systems in place at the Company. For a full description of the Audit Committee’s responsibilities, see further parts of this report. Risk management at the Company is integrated into the corporate risk management process. It is a continuous process of identifying, reviewing and responding to any changes in risks, analytical risk mitigation, and constant risk control improvement. In line with the Company’s internal regulations, risk management consists of the following steps: 1. Analyse the organisational context 2. Identify and assess risks • Identify and classify risks • Perform quantitative and qualitative risk analysis • Analyse controls • Map and prioritise key risks 3. Deal with risks • Plan to deal with risks • Monitor risk proximity • Mitigate risks • Review effectiveness of measures taken 4. Monitor and report Risk management at the Company is an element in the process of enhancing and protecting the Company’s value. The Company has comprehensively identified risks in each area of its operations. The implemented risk management measures are in line with the selected risk management strategy. The risk management process includes making ongoing improvements to the use of risk management tools.

Solutions are in place enabling the management and supervisory bodies to fully monitor the risk management process. Consequently, individual measures form a systematic approach to risk management at the Company. This systematic approach is applied in performing tasks undertaken to review and ensure the correctness and effectiveness of measures taken to manage specific identified risks. The Company’s Internal Audit Department reports directly to the CEO – President of the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. This ensures hierarchical independence for audits and inspections. Internal audit at the Company takes the form of an independent, objective assessment of processes, systems and procedures in place at the Company’s units and subsidiaries, which enables more effective pursuit of Company objectives, identification of areas for operational improvement, and risk mitigation. The internal audit function also involves advisory services.

Grupa Azoty Zakłady Chemiczne Police Group Page 63 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Within the system, the instruments used to manage risks related to the process of preparation of financial statements include internal regulations governing the identification and recording of business events, as well as their presentation and publication. Direct supervision and coordination of work related to the preparation of financial statements falls within the remit of the Chief Accountant. The Company’s financial statements cover all aspects of its business operations. The heads of individual organisational units (departments, business units, support centres, divisions) are responsible for the content of the financial statements in the areas assigned to them under the Company’s organisational structure. Management Board members are actively involved in the preparation of financial statements at each stage of the process, by contributing to the production of individual components and final review of the contents. Also members of the Audit Committee monitor the process of preparation and audit of financial statements. After they are approved by the Management Board, the Company’s financial statements are audited by an independent qualified auditor appointed by the Company’s Supervisory Board.

8.4. Management standards and systems The Management Policy implemented at the Company sets out the mission, courses of action and strategic objectives implemented based on management systems compliant with the highest international standards. The ever-growing social requirements and expectations regarding safety of processes and products requires conscious care of the product along the entire value chain, from raw materials procurement to final application. Based on its strategy, long-standing tradition, recognized brand, as well as Grupa Azoty’s support, the Company wants to strengthen its market position and meet the expectations of its business and social partnership by: • tracking global trends in applied technologies, ensuring continuous development and improvement of processes and products, • improving employees’ competences and optimal use of resources, creating conditions for the development of the entire Company, • continuously adapting product quality to customer requirements, • building strong and effective relationships with customers and by providing professional customer service, • reducing the sensitivity to changes in external costs of energy through the use of effective technologies and energy-efficient solutions, • reducing production costs through upgrades of key production lines, • improving the effectiveness of key processes and of knowledge gathering and management. The Company follows environmental protection principles as an integral part of the continuous improvement process, striving to achieve lasting and sustainable development which would respond to the needs of present and future generations. The Company strives to create optimum working conditions in a systemic and continuous manner, minimising risks at workplaces and improving OHS procedures in all management processes. The Company pursues a Management Policy which guarantees that strategic goals are achieved in reliance on an Integrated Management System consistent with international standards. The Integrated Management System is customer-centric and is structured around the principles of reducing environmental losses, mitigating the risk of hazards, and ensuring continuous improvement. The Company uses the following management systems and standards to ensure its actions and initiatives are effective: • Quality Management System compliant with the ISO 9001:2015 standard, • Environmental Management System compliant with the ISO 14001:2015 standard, • Energy Management System compliant with the ISO 50001:2011 standard, • Occupational Health and Safety Management System compliant with the BS OHSAS 18001:2007 standard, • Management System compliant with the PN-EN ISO/IEC 17025:2017 standard (setting general requirements for the competence of testing and calibration laboratories), • Food Safety Management System compliant with the ISO 22000:2005 standard, • Product Stewardship Standard Fertilizers Europe.

Grupa Azoty Zakłady Chemiczne Police Group Page 64 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

These systems are subject to periodic assessment and recertification. The Company assesses the compliance of its activities with the implemented management systems and legal requirements. Compliance with quality, environmental, workplace health and safety, food safety, energy management and laboratory competence requirements is tested in the course of internal audits of the management systems. Audit findings are presented at management reviews attended by representatives of top management and serve as the basis for improvement recommendations. External audits carried out by certification bodies confirm compliance of the Company’s management systems with relevant standards, which has been documented by appropriate certificates. 8.5. Shareholding structure Table 45. Shareholding structure as at this report date Number of Ownership Number of % of total Shareholder shares interest (%) voting rights voting rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 12,192,632 16.26 12,192,632 16.26 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other shareholders 2,940,046 3.92 2,940,046 3.92 75,000,000 100.00 75,000,000 100.00

According to the list of persons entitled to participate in the Extraordinary General Meeting convened for April 4th 2019, provided to Grupa Azoty Police by the CSDP, on March 27th 2019 OFE PZU Złota Jesień registered 12,192,632 shares in the Company, i.e. the shareholder’s interest in the Company’s share capital increased from 16.19% to 16.26%.

Table 46. Shareholding structure as at December 31st 2018 Number of Ownership Number of % of total Shareholder shares interest (%) voting rights voting rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 12,140,000 16.19 12,140,000 16.19 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other shareholders 2,992,678 3.99 2,992,678 3.99 75,000,000 100.00 75,000,000 100.00

Grupa Azoty Zakłady Chemiczne Police Group Page 65 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Table 47. Shareholding structure as at December 31st 2017 Number of Ownership Number of % of total Shareholder shares interest (%) voting rights voting rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 11,956,000 15.94 11,956,000 15.94 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other shareholders 3,176,678 4.24 3,176,678 4.24 75,000,000 100.00 75,000,000 100.00

8.6. Special control powers of holders of securities All the Company shares carry the same rights. The State Treasury’s right to call General Meetings and to appoint and dismiss a Supervisory Board member are discussed in Sections 8.11 and 8.9 of this report.

8.7. Restrictions on voting rights There are no restrictions on the exercise of voting rights, such as restrictions on the exercise of voting rights by holders of a specific proportion or number of voting rights or time restrictions on the exercise of voting rights, etc.

8.8. Restrictions on the transferability of securities The Company’s Articles of Association impose no restrictions on the transferability of shares other than those provided for in the generally applicable laws.

8.9. Rules governing appointment and removal of the management staff. Powers of the management staff, including in particular the authority to resolve to issue or buy back shares Management Board Procedures for the appointment of management personnel and for the granting of their powers The Company’s Management Board comprises from one to five persons, including the President, Vice- Presidents and Members of the Management Board. The number of Management Board members is defined by the governing body that appoints the Management Board. The Management Board’s joint term of office is 3 (three) years. A member of the Management Board must meet the requirements for candidates to management bodies, laid down in the Act on State Property Management of December 16th 2016. A Management Board member submits his/her resignation to the Supervisory Board in writing. Subject to the provision discussed below, members of the Management Board or the entire Management Board are appointed by the Supervisory Board, following a recruitment process held to verify and evaluate the qualifications of candidates and to select the best candidate. The rules of and procedure for recruitment process are set out in resolutions of the General Meeting. As long as the State Treasury holds Company shares and the Company’s annual average headcount exceeds 500, the Supervisory Board appoints to the Management Board one person elected by the Company’s employees, to serve on the Management Board during its term of office. The person who receives the highest number of validly cast votes is considered to be a Management Board candidate elected by employees. The election results are binding on the Supervisory Board if at least 50% of all eligible employees participate in the election. The election is a direct election held by secret ballot and open to all employees, and is conducted by the Election Committees appointed by the Supervisory Board from among the Company’s employees. Failure by the Company’s employees to elect a member of the Management Board does not prevent the Management Board from adopting valid resolutions.

Grupa Azoty Zakłady Chemiczne Police Group Page 66 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Each member of the Management Board may be removed from office or suspended from their duties by the Supervisory Board or the General Meeting. The Management Board manages the affairs of the Company and represents it in all actions before and out of court. The operating procedures and the division of responsibilities among members of the Management Board are defined in the Rules of Procedure for the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A., adopted by the Management Board’s resolution and approved by the Supervisory Board. Pursuant to the Rules, the powers and responsibilities for the supervision of individual areas of the Company’s business are defined by the Management Board by way of resolutions. The Management Board is not authorised to make a decision to issue or buy back shares. Supervisory Board Rules governing appointment of supervisory staff The Supervisory Board consists of between five and nine members appointed by the General Meeting. However: • as long as the State Treasury holds Company shares, the entity authorised to exercise rights conferred by the shares held by the State Treasury has the right to appoint and dismiss one member of the Supervisory Board. Such appointment or dismissal takes effect upon service of a relevant notice/statement to the Management Board. • Some of the Supervisory Board members are elected pursuant to Art. 14 of the Act on Commercialisation and Certain Employee Rights. Members of the Supervisory Board are appointed for a joint three-year term of office. A member of the Supervisory Board appointed by the General Meeting may be dismissed by the General Meeting at any time. Candidates to the Supervisory Board appointed, nominated or proposed by the State Treasury or a state-owned legal person, or by the Company’s parent within the meaning of Art. 4.3 of the Competition and Consumer Protection Act of February 16th 2007, should meet the requirements set out in Art. 19 of the Act on State Property Management of December 16th 2016. Supervisory Board Members may tender their resignations in writing to the Management Board. The procedure for appointment of the Supervisory Board members elected from among candidates nominated by the employees is defined in detail in the Election Rules, adopted by the Supervisory Board by way of a resolution and approved by the General Meeting. The results of an election held in accordance with the provisions referred to above are binding on the General Meeting. The General Meeting appoints the Chairperson of the Supervisory Board. The Deputy Chairperson and the Secretary are elected by the Supervisory Board, at its first meeting, from among its members.

8.10. Rules governing amendments to the Parent’s Articles of Association Resolutions to amend the Articles of Association are passed following a three-fourths majority vote at the General Meeting. 8.11. Operation of the General Meeting The General Meeting operates in accordance with the Articles of Association and the Rules of Procedure for the General Meeting, which set out in particular the rules governing the operation of the General Meeting, the holding of meetings and adoption of resolutions. The General Meeting adopts the Rules by way of a resolution. The General Meeting strives to ensure the stability of the Rules. Calling of General Meeting. Agenda The General Meeting is convened by the Company’s Management Board: • on its own initiative, • at the request of the Supervisory Board, expressed in the Supervisory Board’s resolution, • at the written or electronic request from a shareholder or shareholders representing at least one- twentieth of the share capital, • at the written request of the State Treasury (shareholder) irrespective of its interest in the share capital, submitted no later than one month before the proposed date of the General Meeting.

Grupa Azoty Zakłady Chemiczne Police Group Page 67 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

The Annual General Meetings is convened by the Management Board, and it should be held within six months of the end of the previous financial year. The business of Annual General Meetings covers: • review and approval of the financial statements for the previous financial year and of the Directors’ Report on the Company’s operations, • granting discharge to members of the Company’s governing bodies in respect of their duties, • distribution of profit or coverage of loss, • deciding on the dividend record date, on the dividend payment date and on payment of dividend in instalments, and • review and approval of the Group’s consolidated financial statements for the previous financial year and of the Directors’ Report on the Group’s operations, if their preparation is required under Polish law. The General Meeting may only pass resolutions concerning matters on its detailed agenda. The General Meeting may vote on resolutions concerning matters not included on its agenda, provided that the entire share capital is represented at the Meeting and none of those present objects to the adoption of a resolution concerning a given matter. Furthermore, the General Meeting may vote on resolutions concerning proposals to convene an Extraordinary General Meeting and procedural matters even if they have not been included on the agenda. The agenda is proposed by the Company’s Management Board or another entity which convenes the General Meeting. A shareholder or shareholders representing at least one-twentieth of the Company’s share capital may request that certain items be placed on the agenda of the next General Meeting. The State Treasury as a shareholder has the same right, irrespective of its interest in the share capital. Such requests with the statement of reasons, or draft resolutions on proposed items on the agenda, should be submitted at least 21 days prior to the scheduled date of the General Meeting. A shareholder or shareholders representing at least one-twentieth of the share capital may, before the date of the next General Meeting, submit draft resolutions concerning items placed or to be placed on the agenda of the General Meeting. The State Treasury as a shareholder has the same right, irrespective of its stake in the Company’s share capital. Draft resolutions to be recommended for adoption by the General Meeting, and other important materials, must be presented to the shareholders together with the statement of reasons and the Supervisory Board’s opinion thereon prior to the General Meeting, sufficiently in advance to enable the shareholders to read and assess them. From the date of convention of the General Meeting, the Company publishes draft resolutions and all materials relating to the agenda on its website, at the following address: http://zchpolice.grupaazoty.com/pl/ Adoption of resolutions The General Meeting makes its decisions by way of resolutions. Resolutions are passed by voting. Resolutions are passed by an absolute majority of votes, unless the Commercial Companies Code, the Articles of Association and the Rules provide otherwise. Votes are taken by open or secret ballot, depending on the requirements set out in the Commercial Companies Code and the Articles of Association. Before calling a vote, the Chairperson of the General Meeting reads aloud the draft resolution. The text of a resolution put to vote should be formulated in a manner that enables any eligible person who disagrees with how a given matter is resolved to challenge the resolution. Voting may be carried out with the use of electronic devices, including those based on IT systems. Powers and responsibilities of the General Meeting Powers of the General Meeting include in particular: • review and approval of the financial statements for the previous financial year and of the Directors’ Report on the Company’s operations, • granting discharge to members of the Company’s governing bodies in respect of their duties, • distribution of profit or coverage of loss, • deciding on the dividend record date, on the dividend payment date and on payment of dividend in instalments, and • review and approval of the Group’s consolidated financial statements for the previous financial year and of the Directors’ Report on the Group’s operations, if their preparation is required under the Polish Accounting Act, • appointment and dismissal of the Supervisory Board members appointed by the General Meeting, including the Chairperson of the Supervisory Board, subject to the provisions of Art. 30.1 and Art. 32 of the Articles of Association,

Grupa Azoty Zakłady Chemiczne Police Group Page 68 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

• determination of the rules and amounts of remuneration for Supervisory Board members, • approval of disposal or lease of the Company’s business or an organised part thereof, and creation of limited property rights therein, • approval of the following legal transactions if the market value of the subject matter of such transaction exceeds PLN 100,000,000 (one hundred million złoty) or 5% of the Company’s total assets: o acquisition or disposal of real property, usufruct right, or interest in real property or perpetual usufruct right, o acquisition or disposal of non-current assets, o granting of the right to use non-current assets to another entity for a period longer than 180 days in a calendar year, o acquisition or disposal of shares in another company, • determination of rules for disposal of non-current assets whose value exceeds 0.1% of the Company’s total assets, • approval of the execution by the Company of a loan, surety, or any other similar agreement with a member of the Management Board, Supervisory Board, proxy, liquidator, or for the benefit of any such person, • increase in or reduction of the Company’s share capital, • issue of convertible bonds, bonds with pre-emptive rights and subscription warrants, • squeeze-out carried out in compliance with applicable laws, • recognition, use, and release of capital reserves, • use of statutory reserve funds, • decisions with respect to claims for redress of damage inflicted in the course of establishing the Company, its management or supervision, • merger, transformation, or demerger of the Company, • amendments to the Articles of Association and change of the Company’s business, • dissolution and liquidation of the Company, • review of the Supervisory Board’s reports referred to in Art. 28.1.8, 28.1.20, 28.1.22 and 28.1.23 of the Articles of Association, • approval of the Election Rules referred to in Art. 32 of the Articles of Association, as adopted by the Supervisory Board, defining the procedure for election of the Supervisory Board members from among candidates nominated by the employees, • adoption of the rules of procedure for the General Meeting, defining in detail how the Meeting is to be held and pass its resolutions, • determination of the rules of remuneration of Supervisory Board members, • determination of recruitment rules and selection procedure for members of the Company’s Management Board.

8.12. Composition and operation of the Company’s management and supervisory bodies Parent’s Management Board As at January 1st 2018, the composition of the Management Board was as follows: • Wojciech Wardacki, Ph.D. – President of the Management Board, • Włodzimierz Zasadzki, Ph.D − Vice President of the Management Board, • Tomasz Panas −Vice President of the Management Board, • Anna Tarocińska − Member of the Management Board (representing Company employees). On May 30th 2018, following a recruitment procedure, the Company’s Supervisory Board passed resolutions to appoint the Management Board of the eighth joint term of office, commencing on the date of the Annual General Meeting held to approve Grupa Azoty Zakłady Chemiczne Police S.A.’s financial statements for 2017, i.e. June 4th 2018. The composition of the Management Board remained unchanged.14

14For details, see Current Report No. 25/2018 of May 30th 2018 – Appointment of members of Grupa Azoty Police Management Board of eighth term of office.

Grupa Azoty Zakłady Chemiczne Police Group Page 69 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Powers and responsibilities of the Parent’s Management Board In accordance with the Commercial Companies Code and the Articles of Association, the Management Board is the Company’s executive body responsible for managing its affairs and representing it in and out of court. The Management Board, headed by the President, manages the Company and represents it before third parties. All matters connected with the management of the Company’s affairs which are not reserved under the law or the Articles of Association for the General Meeting or the Supervisory Board, fall within the scope of powers and responsibilities of the Management Board. The Management Board operates in compliance with effective laws and is accountable for the management of the Company’s affairs before the Supervisory Board and the General Meeting. Division of powers and responsibilities within the Management Board Pursuant to Supervisory Board’s Resolution No. 26/VI/13 on approval of amendments to the Rules of Procedure for the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A., the division of powers and responsibilities for the supervision of the Company’s individual organisational areas is each time determined and approved by the Company’s Management Board by way of a resolution. As at the date of this report, the division of powers and responsibilities among the Management Board members is governed by: • Management Board Resolution No. 242/VIII/19 of January 4th 2019 concerning the division of powers and responsibilities among the Management Board members with regard to their oversight of organisational areas and business processes, • Organisational Rules adopted by the Management Board in Resolution No. 9/VI/12 of July 6th 2012, as amended (most recently amended by Management Board Resolution No. 223/VIII/18 of December 14th 2018), approved by the Supervisory Board in Resolution No. 269/VII/18 of December 21st 2018. Pursuant to Management Board Resolution No. 242/VIII/19 of January 4th 2019, the supervisory powers and responsibilities are divided among the Company’s Management Board members as follows: • Wojciech Wardacki, Ph.D., President of the Management Board and Chief Executive Officer: o Central Dispatch Division, o Internal Audit Division, o Public Relations Office, o Security Office, o Technology Development Office, o Fertilizer Sales Department, o Corporate Agro Sales Department, o Human Resources and Management Department, o Technical Department, o Fertilizers Business Unit. • Włodzimierz Zasadzki, Vice President of the Management Board: o Pigments Business Unit, o Finance Department, o Controlling Department, o Strategic Procurement Department, o Tendering Department, o Logistics Centre, o Infrastructure Centre. • Tomasz Panas, Vice President of the Management Board: o Nitro Business Unit, o Power Centre. • Anna Tarocińska, Management Board member elected by employees: o Technical Safety Department, o Laboratory Analysis Centre. As regards the division of duties among the Management Board members, the resolution also sets out their powers and responsibilities in the coordination of business processes. The Management Board members oversee and coordinate the following business processes: • Wojciech Wardacki, Ph.D., President of the Management Board and Chief Executive Officer:

Grupa Azoty Zakłady Chemiczne Police Group Page 70 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

o Strategic management, o Comprehensive customer support, o Human resources management, o Investment project management. • Włodzimierz Zasadzki, Vice President of the Management Board: o Financial management, o Financial controlling, o Availability of feedstocks and raw materials, o Logistics support, o Production asset management. • Anna Tarocińska, Management Board member elected by employees: o Technical and environmental safety. The President of the Management Board, assisted by the unit responsible for providing support to the Company’s governing bodies, performs ongoing supervision of the implementation of resolutions of the Parent’s Management Board, Supervisory Board, and General Meeting. The President of the Management Board convenes Management Board meetings on his/her own initiative, or at the request of a member of the Management or Supervisory Board, sets the agenda and chairs the meetings. In the President’s absence, these activities are performed by a Management Board member designated by the President of the Management Board. In accordance with the Organisational Rules of Grupa Azoty Zakłady Chemiczne Police S.A., President of the Management Board – Chief Executive Officer exercises general supervision of the Company’s operations and is assisted by directors of departments, business units and centres, as well as by managers of other organisational units. Powers and responsibilities of the President of the Management Board - Chief Executive Officer include: • general supervision and coordination of Company’s activities, • promoting a good image of the Company as a corporate citizen, • managing the work of the Company’s Management Board and presiding over its meetings, • performing the Company’s responsibilities as an employer within the bounds of the Polish Labour Code, • supervising the restructuring and privatisation processes at the Company and its subsidiaries, • supervising and coordinating business processes specified in the Management Board Rules of Procedure, and supervising organisational units that report directly to the President of the Management Board – Chief Executive Officer, • approving internal audit, business control and stocktaking plans, as well as making decisions on their implementation, and • representing the Company in and out of court, jointly with another Management Board member or proxy. Supervisory Board Composition of the Company’s Supervisory Board as at January 1st 2018 was as follows: • Joanna Habelman − Chairwoman of the Supervisory Board, • Mirosław Kozłowski − Deputy Chairman of the Supervisory Board, • Bożena Licht − Secretary of the Supervisory Board, • Agnieszka Dąbrowska − Member of the Supervisory Board, • Andrzej Malicki − Member of the Supervisory Board, • Maria Więcek − Member of the Supervisory Board. In the reporting period, the composition of the Supervisory Board did not change. The Supervisory Board operates on the basis of: • Commercial Companies Code of September 15th 2000 (Dz.U. No. 94, item 1037, as amended), • Act on Commercialisation and Privatisation, • Accounting Act, • Act on Statutory Auditors, Audit Firms, and Public Oversight, • Company’s Articles of Association, • Rules of Procedure for the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A.

Grupa Azoty Zakłady Chemiczne Police Group Page 71 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Audit Committee On November 23rd 2009, the Supervisory Board established an Audit Committee (Resolution No. 342/IV/09) to improve the effectiveness of the Board’s work and to strengthen control over the Parent and the Group. The Audit Committee is an advisory body acting collectively within the Supervisory Board. As at January 1st 2018 and as at the date of this report, the Committee members were: • Joanna Habelman − Chairwoman of the Audit Committee, • Agnieszka Dąbrowska − Secretary of the Audit Committee, • Mirosław Kozłowski − Member of the Audit Committee, • Maria Więcek − Member of the Audit Committee. The Audit Committee’s tasks include in particular: • monitoring of: o the financial reporting process, o the effectiveness of internal control and risk management systems as well as internal audit systems in place at the Company, including effectiveness of the financial reporting process, o performance of financial audit, in particular an audit conducted by the audit firm, taking into account all recommendations and findings of the Audit Oversight Commission resulting from audits carried out at the audit firm; • controlling and monitoring of the independence of the qualified auditor and the audit firm, in particular when the audit firm also provides services other than the audit of financial statements; • informing the Supervisory Board of the audit findings and explaining how the audit contributed to the reliability of the Company’s financial reporting and what role the Audit Committee played in the audit; • assessing the auditor’s independence and approving the provision of permitted non-audit services by the auditor; • developing a policy for selecting an audit firm to conduct the audit; • developing a policy for providing permitted non-audit services by the audit firm carrying out the audit, entities related to the audit firm or a member of the audit firm’s network; • establishing an audit firm appointment procedure for the Company; • giving recommendations to the Supervisory Board on the appointment of auditors or auditing firms in line with the procedures referred to above; • submitting recommendations to ensure the reliability of the financial reporting process at the Company. Detailed rules of operation of the Audit Committee are provided for in the Rules of Procedure for the Audit Committee approved by Resolution No. 159/VII/17 of the Company’s Supervisory Board of December 28th 2017.

8.13. Diversity policy While the Company has not implemented any formal diversity policy, in its operations it follows clear rules governing employment and promotion. It also seeks to achieve diversity in terms of gender, education, age and professional experience of its entire workforce, including in particular members of the governing bodies and key management personnel. In accordance with the principle of non- discrimination stipulated in Art. 113 of the Labour Code: Any form of workplace discrimination, whether direct or indirect, especially on grounds of gender, age, disability, race, religion, nationality, political views, trade union membership, ethnicity, religious denomination, sexual orientation, or whether an employee is employed under a fixed-term or open, full-time or part-time contract, shall be prohibited. The Company’s Articles of Association define the rules for appointment of the Management Board and Supervisory Board members and for election of the Management Board and Supervisory Board members by employees, while the Collective Bargaining Agreement defines the qualification requirements and the rules of remuneration for the positions classified as managerial. Over the years, the Company has developed rules that support non-discrimination and diversity, and ensure equal opportunities for professional development of the workforce, and thus contribute to higher work efficiency and the Company’s development.

Grupa Azoty Zakłady Chemiczne Police Group Page 72 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

8.14. Remuneration policy Remuneration system at the Parent The Company has in place a remuneration system defined in the Company’s Collective Bargaining Agreement of August 2nd 2011, as amended. The key component of remuneration is base pay, whose amount depends on the pay grade and the range of job groups defined in the Company’s Job Qualification Scale. When determining an employee’s pay grade, the following factors are taken into account: • type of complexity of the work performed, • the employee’s qualifications, • working conditions. The Company’s Collective Bargaining Agreement provides for a number of additional remuneration components, including: • allowance for work under special conditions, • team leader allowance, • allowance for serving as a jumper, • allowance for serving as a spreader, • allowance for serving as a chemical rescue worker, technical rescue worker or member of the SPOT consultancy team, • a lump sum allowance for work in the basic system with a three-shift work time schedule, • a lump sum allowance for work in the basic system with a two-shift work time schedule, • a lump sum allowance for work in the basic system with a two-shift work time schedule (three- team work schedule), • allowance for work on Sundays, statutory holidays, Company holidays, for night-time work and second-shift work, • allowance for serving as an internship supervisor, • allowance for overtime work, • allowance for the time of on-call technical emergency services, • allowance for non-standard loading and unloading activities. The remuneration policy is closely linked to the Company’s financial results. In particular, the rate of wage increase in a given year depends on the Company’s financial condition and profits earned. This is achieved through the use of a remuneration growth index which takes into account the above parameters. The Management Board and the trade unions sign a remuneration agreement defining the remuneration growth rate and the remuneration components to which the growth rate will apply. Certain remuneration components (annual and other bonuses) depend on profits earned by the Company. Annual bonus is paid if the Management Board adopts an appropriate resolution and provided that a predefined threshold of pre-tax profit per employee was reached in the previous year. The bonus is paid after the Management Board has examined and approved financial statements for the previous financial year. The rules for awarding annual bonuses are set out in the Rules of the Annual Bonus Scheme. The Company operates an Incentive Scheme based on the Strategic Score Card, whose rules are specified in the Rules for Granting Bonuses to the Employees of Grupa Azoty Zakłady Chemiczne Police S.A. The annual amount of the Bonus Fund is established by the Management Board in agreement with trade unions. The amount depends on the Company’s economic condition, current availability of funds (taking into consideration the Company’s needs and investments), as well as financial results delivered for the periods preceding the period for which the Fund’s amount is determined. A bonus consists of the base component (representing 70% of the Bonus Fund and depending on the achievement of defined targets) and the discretionary component (representing 30% of the Bonus Fund established and based on results of periodical assessment carried out by the immediate superior). The rules for granting annual and other bonuses to employees are set out in the Rules for Granting Bonuses to the Employees of Grupa Azoty Zakłady Chemiczne Police S.A. and the Rules of the Annual Bonus Scheme. Remuneration rules and amounts of remuneration for management personnel On March 29th 2017, the Extraordinary General Meeting passed Resolution No. 5 to approve the rules of remuneration for members of the Company’s Management Board. According to the resolution, the remuneration comprises a fixed component and a variable component. The Company’s Supervisory

Grupa Azoty Zakłady Chemiczne Police Group Page 73 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Board was authorised to determine the amounts of the fixed remuneration component for individual Management Board members. On March 31st 2017, by Resolution No. 66/VII/17, the Supervisory Board adopted the ‘Remuneration policy for members of the management and supervisory bodies of the Group companies’, which was subsequently amended/updated by Resolution No. 197/VII/18 of April 26th 2018 and Resolution 254/VII/18 of October 1st 2018. Furthermore, on April 6th 2017, the Supervisory Board passed resolutions No. 95/VII/17, No. 96/VII/17 and No. 97/VII/17, defining the amounts of the fixed remuneration for individual Management Board members (depending on a member’s position on the Management Board). Remuneration of members of the Management Board comprises: • fixed monthly remuneration (monthly base pay). The fixed remuneration amount is determined by the Company’s Supervisory Body based on a tariff prepared for each reference group and updated by Grupa Azoty S.A.’s Corporate Supervision Department by the end of the first quarter of each year, which in turn is based on an announcement by the President of the Statistics Poland (GUS) concerning the average monthly salary in the business sector, net of payments from profit for the fourth quarter of a given year, unless the generally applicable provisions suspend the indexation of such remuneration. The fixed remuneration is reduced by the amount payable for the days on which no work was performed by a Management Board member; • variable remuneration. The amount of variable remuneration depends on the progress in the delivery of management objectives (defined and approved by the Parent’s Supervisory Board) and is paid in accordance with the rules stipulated in Resolution No. 5 of the Company’s General Meeting of March 29th 2017, the Act on Rules of Remunerating Persons Who Direct Certain Companies of June 9th 2016 and the Act on State Property Management of December 16th 2016.

Rules governing payment of bonuses to members of the Management Board On March 29th 2017, the Extraordinary General Meeting passed a resolution on the rules of remuneration for members of the Company’s Management Board. Then, by way of a resolution dated March 31st 2017, the Supervisory Board adopted the Remuneration Policy for the management personnel of Grupa Azoty Group companies. The most recent update of the Policy was adopted by the Supervisory Board in a resolution of October 1st 2018. A document “Rules governing variable remuneration of members of the governing bodies of the Grupa Azoty Group for delivery of annual business targets” is an appendix to the Policy. The key terms of the Rules are as follows: • the variable component of remuneration is calculated based on management objectives – key, shared and individual targets, • payment of variable remuneration is conditional upon fulfilment of the minimum level of the key targets defined by the Supervisory Board for a given year, • shared targets are quantifiable and represent 50% of the total value of all targets, • individual targets represent 50% of the total value of all targets, • the amount of variable remuneration depends on the achievement of shared and individual targets. The shared targets are designed to support delivery of the Grupa Azoty Strategy, are outlined in the annual and long-term budgets, and are shared by all Management Board members. As for individual targets, they are assigned by the Supervisory Board to be performed during a financial year by each Management Board member. The Supervisory Board assigns to each Management Board Member two to six individual targets. The amount of variable remuneration of a Management Board member depends on the extent to which the shared and individual targets, as defined in the MBO Sheet approved by the Supervisory Board, have been achieved.

Grupa Azoty Zakłady Chemiczne Police Group Page 74 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Table 48. Remuneration of Management Board members for holding office at the Parent for the 12 months of 2018* Remuneration paid Remuneration fixed variable Total potentially remuneration remuneration due** components components

Tomasz Panas 528.5 4.1 532.6 552.0 Włodzimierz Zasadzki 528.5 23.3 551.8 538.5 Tarocińska Anna 369.9 4.6 374.5 386.4

* Remuneration of Mr Wojciech Wardacki, President of the Management Board and Chief Executive Officer, is presented in the Directors’ Report on the operations of Grupa Azoty S.A. and the Grupa Azoty Group in 2018. ** Remuneration potentially due includes a provision recognised for variable remuneration, which is granted depending on the performance and achievement of management objectives, in accordance with the rules of variable remuneration approved by the Supervisory Board. The remuneration potentially due is expected to be paid in 2019.

Table 49. Remuneration of Supervisory Board members for holding office at the Parent for the 12 months of 2018

Remuneration paid Remunerati on Total fixed variable potentially remuneration remuneration due components components

Dąbrowska Agnieszka 79.3 0.0 79.3 0.0 Habelman Joanna 89.8 0.0 89.8 0.0 Kozłowski Mirosław 84.6 0.0 84.6 0.0 Licht Bożena 79.3 0.0 79.3 0.0 Malicki Andrzej 79.3 0.0 79.3 0.0 Więcek Maria 79.3 0.0 79.3 0.0

For information on other transactions with members of the Company’s management and supervisory bodies, see Note 31 to the financial statements for the 12 months ended December 31st 2018. Rules governing remuneration of key management personnel Persons holding key managerial positions at the Company are hired under management contracts. The rules governing remuneration of key management personnel are included in the Rules Governing Remuneration of the Parent’s Employees hired under management contracts. Remuneration of management personnel is determined in a management contract pursuant to a resolution of the Parent’s Management Board, in accordance with the table of fixed remuneration of management personnel. An employee’s gross remuneration, defined in the employment contract as a multiple of the average remuneration at the Company as at December 31st of the previous year, consists of two components: • fixed lump-sum gross remuneration defined in the management contract, • gross annual bonus granted by the Company’s Management Board. The nominal amount of the annual bonus is 3.5 times the fixed lump-sum gross remuneration defined in the management contract. The nominal amount of the bonus may be additionally increased by 20% of the nominal amount of the employee bonus if the results specified in the Target Sheet are exceeded above 100%, up to 120%. Annual bonuses calculated based on results of the assessment of delivery of the objectives set by the Parent’s Management Board and defined in the Target Sheet for individual employees hired under management contracts must be approved by the President of the Management Board.

Grupa Azoty Zakłady Chemiczne Police Group Page 75 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Evaluation of the remuneration policy The remuneration policy, negotiated with the social partners, is closely linked to the Company’s financial results. The remuneration growth index for any given year is determined based on the Company’s current and expected economic condition. Amounts of certain remuneration components, such as the annual bonus, also depend directly on the Company’s financial results and the actual delivery of the targets set for individual mangers.

8.15. Agreements between the Parent and Management Board members On May 30th 2018, the Company’s Supervisory Board concluded management contracts for the duration of holding the position of President of the Management Board as well as post-employment non-compete agreements with Management Board members. On November 1st 2018, the management contracts were amended.

8.16. Sponsorship, charitable or similar activities Supporting the development of local communities is among the objectives of the Company’s strategy. The Company has maintained long-standing cooperative relations with a number of local clubs, associations and foundations, while supporting individuals and co-organising local events. These initiatives, implemented in line with the social and sponsorship policy, include promotional and advertising agreements, as well as donations. Being an entity of special economic importance for West and the region’s major user of the natural resources, the Company primarily supports projects with a regional focus. The Company builds its socially responsible image by supporting: • both professional and amateur sports, • cultural initiatives, including mass cultural events, • educational institutions for children and youth, • healthcare institutions providing services to employees and their families, • research programmes, • regional environmental initiatives, • social campaigns. Promotional activities with a countrywide and international reach, which contribute to strengthening the image of the entire Grupa Azoty Group, are carried out by the Group’s corporate department based in Tarnów. Cultural initiatives The Company has entered into a partnership with the Social, Educational and Cultural Association of the Youth Wood & Brass Band, which promotes musical culture, representing the region and the country internationally. The Company also signed an agreement with the Family-Development-Success Foundation of Szczecin, under which a CD with recordings of the Animato harmonica band was released. Sports initiatives 2018 saw the Company’s continued cooperation with a number of professional and amateur sports clubs and associations. For another year it supported Pogoń Szczecin, a premier league football team, and Chemik Police, a volleyball women’s club which has won multiple Poland’s championships and competed in the women’s volleyball European Champions League. In 2018, the group of athletes supported by the Company was joined by Marcin Lewandowski, who has repeatedly ranked second in the 1,500m run at Europe’s and the world’s indoor championships. Cooperation with local sports promoters was equally important: • The Company signed another agreement with the Chemik Police Football Club. In the 2017/2018 season, the club’s first team, whose members include the Company’s employees, was promoted to the fourth league. The club also runs the Youth Football Academy of Police for the youngest residents of Police (some of them children of Grupa Azoty Police employees); • Support was provided to the ‘Wodnik’ Students’ Integration Swimming Club of Police and the ‘Champion’ table tennis students’ club; • The Company also supported local sports events, attracting competitors not only from Poland but also from abroad, including the ‘Wild Weekend’, a three-day event of extreme running races in

Grupa Azoty Zakłady Chemiczne Police Group Page 76 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

various categories, Poland’s Seniors Cup in fencing and the final round of the Kazimierz Górski Football Tournament for boys born in 2003. Promotion of national tradition and patriotic attitudes In 2018, the Company became involved in the activities of the Foundation for Polish Values, which has for several years run the laudable initiative of supporting Poles in Kresy (Eastern Borderlands of pre-WW2 Poland). In addition to the agreement signed with the Foundation, which involved promotion during the ‘Gift Box for a Borderlands Compatriot and Hero’ campaign, the Company donated T-shirts signed by athletes supported by the Grupa Azoty Group for the fundraising auction. The auction proceeds were used to finance the Gift Boxes for Compatriots. In 2018, with the support from the Company, the Foundation also organised the 6th edition of the ‘Wolf’s Trail’ Cursed Soldiers Memorial Race, and the participation of former anti-communist opposition activists in the Workers Countrywide Pilgrimage to the Jasna Góra Monastery. Health promotion For another year, the Company extended its support to the H. Dunant Blood Donor Club in Police and, at the Club’s request, agreed to become its patron. The Club carried out several blood donor sessions on the Company’s premises. Education of children and youth 2018 saw many interesting educational projects. The Company signed a letter of intent and an agreement with the Police County for cooperation related to the Vocational and Permanent Education Centre. The agreement provides opportunities for young people to gain professional qualifications dedicated to the Company’s needs: a chemical technology technician and a chemical plant operator. In addition, the Centre will provide a number of training courses for existing employees, aligned with the Company’s needs. The Company also became patron of the school programmes educating chemical technology technicians at the Władysław Orkan School Complex No. 2 in Szczecin. Students of the Police School Complex, due to graduate in 2019 in the chemical programme under the Company’s patronage, completed their internships at the Company, the best ones having received scholarships. Charitable giving policy The Company actively responds to social needs through such initiatives as financial and in-kind donations. The detailed procedures for granting assistance and the causes for which donations may be granted are defined in the Charitable Donation Rules. In 2018, support was granted to local clubs, associations, Company employees and other individuals. These initiatives are usually related to the promotion of sports and healthy lifestyles, social assistance, holidays for children and youth, culture and arts, or religious worship. The initiatives supported by the Company included: • in-kind assistance in the form of a washing and drying machine, and tourist beds for a family into which quadruplets were born in 2018; • financing of treatment and rehabilitation of several Grupa Azoty Police employees; • support for local sports clubs, including the Police Sports Academy, the ‘Ósemka’ Students’ Field and Track Club and the TKKF ‘TYTAN’ Physical Culture Promotion Association, to help them organise sports events; • donations to Company employees who promote sports and healthy lifestyles; • donation to a children’s home in Police to help pay for the children’s holidays; • support for the Queen of Apostles Hospice Association, which is building an inpatient hospice in Tarnów; • support for educational activities run by local schools, • support for the Szczecin Chapter of the Polish Angling Association for reintroducing fish into a retention/retarding pond in Police; • covering the cost of transit of various age groups of scouts and guides of the 28 Fire Scout Group to summer camps; • co-financing of renovation of the Church of Our Lady of Immaculate Conception in Police; • support for cultural activities, including the Social, Educational and Cultural Association of the Youth Wood & Brass Band and co-organisation of the Łarpia Sail Festival. The Company’s donations were granted mainly to applicants from the Szczecin Province, but, in justified cases, also from other regions. Each application was processed separately.

Grupa Azoty Zakłady Chemiczne Police Group Page 77 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Corporate social responsibility A number of initiatives are implemented by the Company in order to comply with the requirements applicable to responsible corporate citizens. Therefore, the Company makes every effort to respond to the needs of local communities and its other stakeholders, including employees, institutions and local entities. The Company engages both in community projects and initiatives designed solely for its employees, including sports, educational and OHS projects. In 2018, the Company joined various events held to celebrate the 100th anniversary of Poland’s regaining independence. One of them was the Independence Relay Race, in which ten employees ran 100 kilometres each, with the start and finish lines located near the Company’s premises. The event was held under the National Patronage of the President of the Republic of Poland Andrzej Duda as “one of the projects that aim to celebrate the one hundredth anniversary of Poland’s regaining independence and to honour, commemorate and promote patriotic attitudes, achievements and aspirations of the Polish people”. Children from local kindergartens had an opportunity to take part in one of the largest pre-school sports projects in Europe called the ‘Grupa Azoty Przedszkoliada Tour’. During the event, athletes from local clubs promoted physical activity among the youngest residents and their parents, inviting whole families to join the fun. Several dozen similar events were organised throughout Poland every year. The Group was a partner of the event from 2016. The Company runs various initiatives with its employees in mind. Last year, the management met with retired employees and thanked them in person for their service, presenting them with letters of congratulations and gifts. Management Board representatives also congratulated employees who became parents last year. The meetings were attended by employees and their children, who were given newborn baby kits. The Company also implemented projects designed primarily to promote workplace safety. The most observant employees standing out for their commitment to the project were rewarded under the ‘Stop Accidents’ programme, which seeks to prevent accidents through monitoring workplace safety. The Company also ran a safety-oriented project called ‘5 Minutes to Safety’, which consists of short sessions dedicated to a selected OHS topic. Being a strategic powerhouse in its region, the Company is an important source of information that is widely used in scientific papers and theses. Engaging in the advancement of science, the Company agrees to share materials it has received from universities, research institutes and students from all over Poland, thus promoting the knowledge of its business. Thanks to plant tours organised by the Company, hosts of students and pupils have had the opportunity to see the plant and watch the production processes at close range. The Company provides internship and work placement programmes, which attract applicants from across Poland.

8.17. Entertainment, legal, marketing, public relations, social communication and management consultancy expenditures In 2018, the Company spent PLN 29,185 thousand on entertainment and legal, marketing, public relations, social communication and management consultancy services. Of that amount PLN 21,564 thousand were expenditures on public relations services, PLN 3,460 thousand were marketing expenditures and PLN 1,177 thousand were entertainment expenditures. These expenditures were incurred, among other things, on the Company’s image building through: • sponsorship and promotional activities; • support of local and regional events and entities; • implementation of CSR initiatives; • organisation of events for employees and their families; • organisation of conferences and investor meetings; • internal communication activities. For a detailed description of public relations projects, see Section 8.16. The marketing activities included promotion of product brands. The Company undertook advertising campaigns designed to reinforce brand image and drive sales, while strengthening the visual identity of the Grupa Azoty brand and building the brand’s association with products. In 2018, the amount of legal costs was PLN 1,378 thousand and management consultancy fees came to PLN 1,606 thousand.

Grupa Azoty Zakłady Chemiczne Police Group Page 78 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

8.18. Audit Committee Independence, knowledge and skills of Audit Committee members The Chair of the Audit Committee Joanna Habelman meets the knowledge and competence requirements set out in Art. 129.1 of the Act on Statutory Auditors, Auditing Firms, and Public Oversight. She is a graduate of the University of Szczecin (Faculty of Economics and Management), where she earned a Master’s degree in Finance and Banking (Accounting). She subsequently received a PhD in Economics (Accounting) from the University of Szczecin (Faculty of Economics and Management). She serves as Chief Financial Officer at Zarząd Morskich Portów Szczecin i Świnoujście S.A. Since 2010, she has worked with the WSB University in Szczecin, teaching financial accounting, management accounting and control to postgraduate and MBA students. She upgrades her knowledge by attending training courses and workshops on the operation of audit committees. All the Audit Committee members, including Joanna Habelman, meet the independence criteria stipulated in Art. 129.3 of the Act, except for Maria Więcek, who is an employee representative and meets the requirement for having knowledge and skills in the industry in which the Company operates, as laid down in Art. 129.5 of the Act. Maria Więcek has an engineering degree from the Faculty of Information Technology of the Szczecin University of Technology (since 2009 West Pomeranian University of Technology Szczecin). She majored in Management and Production Engineering. She joined Zakłady Chemiczne Police S.A. in 1989 as Senior Draughtswoman at the Design and Construction Office (1989–2000). Subsequently, she worked as Digital Map Specialist at the Chief IT Engineer Office (2000–2003), Development and Analysis Specialist, then as Digital Map Coordinator at the ICT Office (2003–2008), Head of Digital Map Team at the Investment Project Office (2008–2011), and Digital Map Specialist at the Asset Management Department (2011−present). Permitted non-audit services On March 29th 2018, the Audit Committee of Grupa Azoty Zakłady Chemiczne Police S.A., having concluded that no indication existed that the auditor’s independence might be threatened, passed Resolution No. 66/18 to give consent for Ernst&Young Audyt Polska Sp. z o.o. sp. k. to provide permitted non-audit services related to: • review of the Company’s half-year financial statements; • review of the Company’s half-year consolidation packages; • audit of the Company’s full-year consolidation packages; • audit of the full-year consolidation packages prepared by the following subsidiaries: o Grupa Azoty Police Serwis Sp. z o.o. o Koncept Sp. z o.o. o Transtech Sp. z o.o. o Zarząd Morskiego Portu Police Sp. z o.o. o PDH Polska S.A. The services will cover the period from 2017 to 2019. Key features of the auditor selection and appointment policy The Policy on Selection and Appointment of Audit Firm to Audit Financial Statements of Grupa Azoty Zakłady Chemiczne Police S.A. was adopted on a recommendation from the Audit Committee by way of Resolution No. 142/VII/17 of the Company’s Supervisory Board on October 21st 2017. It was then reviewed and left unamended by way of the Supervisory Board’s Resolution No. 249/VII/18 of September 21st 2018. The key provisions of the Policy are as follows: 1. The Company is a public interest entity within the meaning of the Act on Statutory Auditors, and the Group’s parent company. 2. The Company’s financial statements are subject to statutory audits and reviews by an audit firm, in accordance with applicable laws, including International Standards. 3. The period of uninterrupted engagement of an audit firm, or its affiliated audit firm or a member of their network operating in the European Union, to perform statutory audits referred to in the second paragraph of Article 17(1) of Regulation 537/2014, may not exceed five years. 4. The lead auditor may not conduct statutory audits at the same public interest entity for more than five years.

Grupa Azoty Zakłady Chemiczne Police Group Page 79 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

5. The lead auditor may again conduct statutory audits of the entity referred to in Section 4.4 at least three years after the end of the last statutory audit performed by the lead auditor. 6. The term of the initial audit engagement letter with an audit firm should not be less than two years, with an option to extend the term for further periods of at least two years. The aggregate duration of the engagement may not exceed the period specified in item (3) above. 7. The criteria applied by Audit Committee and Supervisory Board members when selecting an audit firm should include: 1) whether the audit firm and the lead auditor meet the independence and impartiality criteria set out in the Act on Statutory Auditors and in Regulation 537/2014; 2) whether the independence of the audit firm and the lead auditor is not threatened, including whether the audit firm does not provide to the Company or its controlled companies any services that are prohibited under the Regulation and the Act on Statutory Auditors; 3) whether the audit firm has competent staff, time and other resources necessary to properly conduct the audit; 4) whether the audit firm has the knowledge of the industry in which the Company operates; 5) whether the audit firm and the lead auditor meet other criteria defined in applicable laws, including those relating to the period of rotation of the audit firm and the lead auditor. Key features of the policy on provision of permitted non-audit services The Non-Audit Services Policy was adopted on the Audit Committee’s recommendation by the Supervisory Board’s Resolution No. 141/VII/17 of October 19th 2017 and was subsequently reviewed and amended by the Supervisory Board’s Resolution No. 251/VII/18 of September 21st 2018. The purpose of the Policy is to ensure that the Company’s activities are compliant with the Act on Statutory Auditors, Audit Firms, and Public Oversight of May 11th 2017, including Art. 130.1 of the Act, and with Regulation (EU) No 537/2014 of the European Parliament and of the Council of April 16th 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC. The key provisions of the Policy are as follows: • The statutory auditor or the audit firm may not provide any prohibited services, within the meaning of Regulation 537/2014 or the Act on Statutory Auditors, directly or indirectly to the Company or its controlled companies: o from the beginning of the audited period until the date of issue of the audit report; o in the financial year immediately preceding the period referred to in item (1) above, in respect of the services comprising the provision and implementation of internal control or risk management procedures related to the preparation and/or control of financial information, or the design and implementation of financial information technology systems. • The statutory auditor or the audit firm may provide non-audit services to the Company or its controlled companies, provided that the Audit Committee approves the provision of such services after having carried out an appropriate assessment of the threats to and safeguards of the audit firm’s independence. • The Policy defines the following non-audit services approval procedure: o A request for approval of the provision of non-audit services by the audit firm is submitted to the Audit Committee through the Management Board Office by: 1) member of the Management Board in charge of Finance, upon request from the Company’s organisational unit concerned, where the services are to be provided to the Company; or 2) member of the Management Board in charge of Finance, upon request from the controlled company concerned submitted through the Company’s Corporate Management Office, where the services are to be provided to a controlled company. o Before considering the request referred to in paragraph (1), the Audit Committee must undertake an independence assessment based on the information concerning past experience of working with the audit firm as well as information contained in the request referred to in paragraph (1). o In making a decision concerning the request referred to in paragraph (1), the Audit Committee may: 1) consult experts;

Grupa Azoty Zakłady Chemiczne Police Group Page 80 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

2) request that the Company, its controlled companies or the audit firm provide relevant documents or information necessary to perform the independence assessment referred to in paragraph (2). o If a positive independence assessment is issued and there are no other reasons to refuse the consent, the Audit Committee may grant its consent for the provision of non-audit services. o When considering the request referred to in paragraph (1), the Audit Committee may issue guidelines or recommendations relating to the audit firm’s engagement. o The Company must communicate that the Audit Committee has granted its consent for the provision of non-audit services to the Company and its controlled companies every time such consent is issued. Such information is communicated by the Company’s Management Board Office through the Corporate Supervision Department of Grupa Azoty S.A. to a member of the Management Board of Grupa Azoty S.A. in charge of Finance, who forwards the communication to the Audit Committee of Grupa Azoty S.A. Auditor appointment recommendation A recommendation to appoint Ernst & Young Audyt Polska Spółka z ograniczoną odpowiedzialnością sp. k. of Warsaw for 2017–2019 was issued by the Audit Committee on June 20th 2017 by Resolution No. 58/17 concerning a recommendation to the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. on the appointment of an audit firm. The recommendation was issued in accordance with the adopted Grupa Azoty S.A. Corporate Supervision Policy (Section 3.2.5.3), pursuant to Resolution No. 56/X/2017 of the Supervisory Board of Grupa Azoty S.A. of March 28th 2017 on the appointment of an auditor to review and audit the financial statements of Grupa Azoty S.A. and the consolidated financial statements of the Grupa Azoty Group for 2017, 2018 and 2019, which constituted a recommendation for the Supervisory Boards of the Group subsidiaries. Frequency of Audit Committee meetings The Audit Committee of the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. met eight times and passed nine resolutions during 2018. The most important business of the Audit Committee included: • monitoring the work of the Internal Audit Department of Grupa Azoty Zakłady Chemiczne Police S.A.; • monitoring the Company’s risk management system and identified risks; • monitoring the financial reporting process; • monitoring the conduct of the financial audit activities; • reviewing the policy and procedure for the selection and appointment of an audit firm to audit financial statements of Grupa Azoty Zakłady Chemiczne Police S.A. and the non-audit services policy.

9. Other material information and events 9.1. Qualified auditor Parent Entity authorised to review and audit the financial statements for the financial year 2018: • Ernst & Young Audyt Polska Sp. z o.o. sp.k., with its registered office at Rondo ONZ 1, Warsaw, Poland. • Date of the agreement for review and mandatory audit: July 27th 2017 • Term of the agreement: review and audit of financial statements for 2017–2019. Table 50. Fees payable to auditors for services rendered to the Parent Item 2018 2017 Audit of the full-year separate and consolidated financial statements of the Company (the Group) and audit of the 100 136 consolidation package Review of the half-year separate and consolidated financial statements of the Company (the Group) and review of the 49 53 consolidation package Other services - - Total 149 189

Grupa Azoty Zakłady Chemiczne Police Group Page 81 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Table 51. Fees payable to Ernst & Young Audyt Polska Sp. z o.o. sp. k. and other EY member firms for services rendered to the Group subsidiaries Item 2018 2017 Audit of the statutory full-year financial statements 79 157 Audit of the consolidation package 10 10 Other services - 60* Total 89 227 * Financial audit of the financial statements of Supra Agrochemia Sp. z o.o. for the six months ended June 30th 2017.

Table 52. Fees payable to other qualified auditors for services rendered to the Group subsidiaries Item 2018 2017 Audit of the full-year separate financial statements and audit of the - 13 consolidation package Total - 13

9.2. Environmental performance The Company constantly monitors its ability to meet any newly legislated environmental requirements, and actively participates in social consultation of draft legal acts. Compliance with legal requirements The Company operates based on an integrated permit, dated January 9th 2014, with amendments. The validity of the integrated permit is monitored on an ongoing basis, as a result of which three decisions of the Marshal Office of the Szczecin Province amending the permit were obtained in 2018. Reasons for the amendments included, among other things: • the upgrade of the EC II CHP plant, including the construction of a flue gas desulfurisation unit based on the wet ammonia process, NOx reduction unit based on Selective Non-Catalytic Reduction, as well as the upgrade of electrostatic precipitators, • the need to revise the provisions relating to the permitted emission volumes of gases and particulate matter for the EC I CHP plant, • the need to introduce changes to the provisions concerning the sea port following the unloading facility upgrade, • the need to introduce changes regarding titanium white production emitters, • the upgrade of the PF4 system at the Phosphoric Acid Department, involving implementation of the dihydrate hemihydrate DA-HF process to replace the dihydrate production method. The Company is obliged to apply, by February 16th 2019, for harmonising the integrated permit with European Commission Implementing Decision (EU) 2017/1442 of July 31st 2017 establishing conclusions concerning the best available technologies (BAT) for large combustion plants in accordance with Directive 2010/75/EU of the European Parliament and of the Council (“LCP Conclusions”). No environmental fines were imposed on the Company in the reporting period. Systematic assessment of the risk of soil, land and groundwater contamination The Company performs regular assessment of the risk of soil, land and groundwater contamination with hazardous substances from the Company’s units. The ‘Assessment of soil, land and groundwater contamination risk’, performed in line with Scheme No. SP-O-P06-01, did not reveal any soil or groundwater contamination in 2018. External inspections In 2018, two environmental inspections were carried out by the Szczecin Provincial Inspectorate for Environmental Protection: The first inspection, carried out from May 21st to June 26th 2018 by the Provincial Inspectorate for Environmental Protection, was to check the Company Wastewater Treatment Plant’s and the EC II CHP plant’s compliance with environmental protection regulations. According to the post-inspection report, the permitted level of sulfur dioxide emissions specified in the Transitional National Plan for the EC II CHP plant (boilers K1 and K2) was exceeded in 2017 by 460.20 Mg. In 2018, a flue gas

Grupa Azoty Zakłady Chemiczne Police Group Page 82 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) treatment system was placed in regular service, which resulted in a significant reduction of air emissions of sulfur dioxide and particulate matter from the EC II CHP plant. From June 4th to June 28th 2018, the second inspection was carried out jointly by the Provincial Inspectorate for Environmental Protection (WIOŚ), the National Labour Inspectorate (PIP) and the State Fire Service (PSP) under the signed declaration of intent to improve work safety, fire safety and environmental protection standards for the chemical industry. The purpose of the inspection was to check the operation of the major industrial accident prevention system. No irregularities were identified by the Szczecin Provincial Inspectorate for Environmental Protection. Solid waste management In 2018, the Company generated 4,130.6 thousand Mg of waste, including 9.6 thousand Mg of hazardous waste. The Company’s main process waste is phosphogypsum (1,850.7 thousand Mg), which has been entirely disposed of by being deposited in the Company’s phosphogypsum landfill site – total weight of the landfilled waste reached 1,850.8 thousand Mg (including 0.1 thousand Mg of assorted waste). In 2018, the Company received 18.7 thousand Mg of waste from external companies. 2,226.1 thousand Mg of waste was processed in the Company’s units, including 364.3 thousand Mg in recovery processes and 1,861.8 thousand Mg in disposal process. 120,444.0 thousand Mg of waste was transferred to third parties (holding appropriate decisions allowing them to manage waste). In 2018, the iron sulfate landfill site had a negative balance of -48.2 thousand Mg. Waste was managed in compliance with the terms of the integrated permit. Additionally, in order to meet the appropriate targets applicable to recovery and recycling of packaging waste, including composite and/or hazardous materials packaging waste, the Company cooperates with Branżowa Organizacja Odzysku Opakowań S.A. and the Polish Chamber of Recovery and Recycling of Packaging. In accordance with the provisions of the amended Waste Act, the Company submitted new applications to have its iron sulfate, hydrolytic acid, ash, slag, and phosphogypsum recognised as by- products. The Company received three decisions, issued on February 28th 2019, recognising the following wastes as by-products: • Hydrolytic acid – decision of the Marshal of the Szczecin Province No. WOŚ-I.7245.1.37-4.2018.AK • Slag, bottom ash, boiler dust and coal fly ash – decision of the Marshal of the Szczecin Province No. WOŚ-I.7245.1.40-6.2018.AK • Iron sulfate – decision of the Marshal of the Szczecin Province No. WOŚ-I.7245.1.39-4.2018.AK. Water and wastewater management The Company operates a sustainable water and wastewater management programme. It takes care to ensure that the emission parameters are compliant with the terms of its integrated permit by supervising the wastewater treatment process. For its energy generation and industrial process purposes, the Company draws water from two surface water intake facilities: • a river-bank water intake facility located at 48+900 km of the Szczecin − Świnoujście water lane, on the western arm of the Oder river, • a water intake facility on the Gunica river (the facility on the Gunica river was built along with a retention/retarding reservoir) in order to secure sufficient volumes of water available for drawing without overexploiting the river’s water resources. Water from Gunica is drawn periodically depending on the salinity of water in the Oder river. The water abstracted by the Company is used in industrial processes as well as for cooling and fire- fighting purposes. Industrial (process) wastewater generated from production processes is channelled to the Company Wastewater Treatment Plant. Spent cooling water and stormwater from the plant premises is discharged directly to the surface waters of the Oder river. Spent cooling water undergoes regular automated pH monitoring. Process wastewater, leachate from the phosphogypsum landfill site, leachate from the iron (II) sulfate landfill site, sanitary sewage and municipal wastewater from the town of Police are treated at the Company’s collective mechanical and chemical wastewater treatment plant. The treated wastewater is monitored in accordance with the terms of the integrated permit. At present, the volume of discharged wastewater is monitored on an ongoing basis, while the quality of wastewater discharged into water is regularly examined by an accredited laboratory. Tests are performed in line with reference methods set forth in the Regulation of the Minister of Environment

Grupa Azoty Zakłady Chemiczne Police Group Page 83 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated) on the conditions to be met when discharging wastewater into waters or soil, and on substances particularly harmful to the water environment, dated November 18th 2014 (Dz.U.2014.1800). In 2018, the Company discharged 32,242.7 dam3 of wastewater treated at its Wastewater Treatment Plant into the Oder river (internal seawaters). The Company meets all the requirements defined in the integrated permit for the quantities of abstracted water, volumes of discharged wastewater, pollution parameters of treated wastewater, as well as the amounts of stormwater and spent cooling water. Air emissions The Group takes special care to ensure compliance with the terms of its integrated permit and the applicable laws with respect to air emissions from its production facilities. At the moment, two units are monitored on a continuous basis: • the EC II CHP plant − for SOx, NOx, and particulate matter emissions, • the titanium dioxide production unit – for dust emissions from the milling of feedstock and grinding of dry pigment, and for emissions of sulfur dioxide from the feedstock calcination and decomposition process. The Company monitors the volumes of emissions of gaseous and particulate pollutants in accordance with the requirements defined in the integrated permit. To reduce pollutant emissions from the highly polluting units, overhaul and upgrade work is performed on flue gas treatment units, which requires substantial expenditure, including on replacement of filter cloths, repairs of absorbers and scrubbers, and upgrades of dust filters. The Company meets the legal requirements pertaining to integrated air pollution control, and complies with the requirement to provide external supervisory authorities with relevant reports in a timely manner. Furthermore, in accordance with the integrated permit requirements, pollutant emissions are monitored on a 24/7 basis at three stations, whose location allows the Company to assess the impact of pollutants generated during normal operation of its units. Measurements are taken at the following points in the vicinity of the plant: • ul. Piotra i Pawła, Police, • , • premises of the Szczecin and Police Municipal Transport Company terminal in Police. Technical safety In 2018, there was no major industrial accident at the Company, and there was no accident that would have a significant effect on the Company’s financial performance. In 2018, the Company continued its cooperation with the State Fire Service in Police in order to raise staff’s awareness of operational and rescue measures as well as to consider potential technical and technological problems that may arise in connection with the operation of its production units. Accordingly, an annual training plan was prepared involving the exchange of knowledge and experience between the Company Fire Brigade and the State Fire Service in Police. The training is part of a wider programme to ensure the highest level of safety. In March 2018, national rescue drills code-named ‘AZOTY-18’ were carried out. The exercises continued for 36 hours without any breaks and included various episodes, such as manoeuvres on the Company premises in which fire protection units from the Szczecin, Poznań, Zielona Góra and Wrocław provinces took part. The exercises were an organisational success, as confirmed by the Commander- in-Chief of the State Fire Service in the Province of Szczecin, who thanked the Head of the Company’s Technical Safety Department. In the first quarter of 2018, the Company submitted an Internal Rescue Operation Plan to the Commander-in-Chief of the State Fire Service in the Province of Szczecin. As part of the Assistance System for the Transport of Hazardous Materials (SPOT), in the second quarter of 2018 the Company’s representatives attended a working meeting of the System Signatories. In the first and second quarters of the year, the Company participated in application exercises organised by other SPOT Signatories. In the second half of 2017, the Company further tightened its cooperation with the State Fire Service in Police with regard to raising staff’s awareness of operational and rescue measures as well as potential technical and technological problems that may arise in connection with the operation of its production units. Accordingly, an annual training plan was prepared involving the exchange of knowledge and experience between the Company Fire Brigade and the State Fire Service in Police. The training is part of a wider programme to ensure the highest level of safety.

Grupa Azoty Zakłady Chemiczne Police Group Page 84 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

9.3. Awards and distinctions 2018 brought a number of distinctions that the Police-based Company received either independently or as a member of the largest chemical group in Poland. The most important of them included: • Transparent Company 2017 – a title awarded to Grupa Azoty Police in the second edition of a ranking by the Parkiet daily, the Institute of Accounting and Taxation, and the Warsaw Stock Exchange. • GOLD CARD OF SAFE WORK LEADERS – a distinction awarded by the Central Institute for Labour Protection for 2019–2020. The Institute appreciated some of the schemes in place at the Company, such as ‘STOP Accidents’ and ‘Report a Risk’. • Medals for long service, awarded by the President of the Republic of Poland, were presented to 79 of Grupa Azoty Police employees by the Governor of the Province of Szczecin during the Well Serving Employees Gala event held as part of last year’s Chemist Day celebrations. • Polish Chemical Industry Ambassador – a title awarded to the Grupa Azoty Group by the Polish Chamber of Chemical Industry in association with the Jury of the Polska Chemia campaign. It is given to institutions and companies that are particularly committed to promoting the brands marketed with the special Polska Chemia logo in recognition of their contribution to the sector’s success. • Top Brand 2018 − a title awarded to the Group as the undisputed leader of the chemical industry. The Grupa Azoty Group was recognised as the brand that reached the broadest audience with information on its operations. • Second place for the Grupa Azoty Group in last year’s ranking to highlight the company with the best investor relations in 2017. The ranking was compiled following a survey conducted by the Parkiet daily and the Polish Chamber of Brokerage Houses. • Innovative Company of the Hundred Years of Poland’s Independence – a title awarded by the Gazeta Polska weekly in the Company of the Hundred Years of Poland’s Independence contest. Titles were granted to distinguish those companies which, for instance, upheld the traditions of the Second Polish Republic (1918–1939), promoted the hundredth anniversary of restoration of Poland’s independence, or made a special mark in the history of the past century. • Grupa Azoty Group’s inclusion in the 12th edition of RESPECT Index. Ever since the RESPECT Index inception, the chemical group has ranked among the elite of socially responsible companies listed at the Warsaw Stock Exchange.

10. Other information Statement on non-financial information Pursuant to Art. 49b.11 of the Accounting Act, the Company is exempt from the obligation to prepare a statement on non-financial information as its parent, i.e. a higher level entity, issues a consolidated statement on non-financial information covering all companies of the Grupa Azoty Group as well as their respective groups. The Company’s parent is Grupa Azoty S.A. with its registered office at ul. E. Kwiatkowskiego 8, Tarnów, Poland. Explanation of differences between actual results and financial forecasts As no forecasts for 2018 were published, the position of the Parent’s Management Board concerning achievement of such forecasts is not presented. Litigation The Company is not party in any material court, arbitration or administrative proceedings concerning liabilities or receivables referred to in the Minister of Finance’s Regulation on current and periodic information, dated March 29th 2018 (Dz.U. of 2018, item 757, published on April 20th 2018). Material related-party transactions on non-arm’s length terms In 2018, the Group did not enter into any related-party transactions on non-arm’s length terms. Parent’s branches (divisions) The Parent does not operate any branches or divisions outside of its principal place of business. Shares, share issues In 2018, the Parent did not issue, redeem or repay any debt or equity securities.

Grupa Azoty Zakłady Chemiczne Police Group Page 85 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

As at the date of this Report, the Parent was not aware of any agreements between shareholders or any agreements that may lead to future changes in the percentages of shares held by the existing shareholders and bondholders. The Company does not operate any control system for employee share ownership plan.

Material events after the reporting period Proposed share capital increase at the Parent On March 4th 2019, the Company’s Management Board made a decision to propose an increase of the Company’s share capital through a rights issue and amendments to the Company’s Articles of Association. On March 8th 2019, the Company’s Supervisory Board passed a resolution in which it gave its opinion on the proposed share capital increase and amendments to the Articles of Association. The proposed share capital increase will be effected through a secondary public offering (“SPO”) in an amount of up to PLN 1,100,000,000 (one billion, one hundred million złoty), addressed to existing shareholders (shares to be acquired in exercise of pre-emptive rights). The proposed share capital increase should be effected by the end of July 2019. Proceeds from the share issue will be used to support the implementation of the Company’s and the Group’s strategy for the coming years, in particular to diversify revenue streams and increase profitability, and to step up the efforts aimed at expanding the Company’s exposure to non-fertilizer business lines, with Polimery Police being the key project in this respect15. As at the date of authorisation of this report for issue, the Company was awaiting approval from the General Meeting, which is to be held on April 26th 201916. Share capital increase at a subsidiary On April 8th 2019, the Company’s Supervisory Board passed a resolution to approve the acquisition of 6,551,092 new shares in PDH Polska S.A.17 Significant developments concerning the Polimery Police project On March 19th 2019, the Management Board of PDH Polska S.A. passed a resolution to approve Hyundai Engineering Co., Ltd. as a pre-selected bidder in the tender to award a lump-sum turn-key contract for the execution of the Polimery Police project.18 On April 12th 2019, the Company’s subsidiary PDH Polska S.A. (“PDHP”) received a letter of intent from Korea Overseas Infrastructure & Urban Development Corporation (“KIND”) concerning potential involvement of KIND in the financing of PDHP’s planned Polimery Police project by making a contribution to PDHP’s share capital of up to USD 50m (the “Investment”). The Letter of Intent does not constitute a firm commitment by KIND to make the Investment. The Letter of Intent is valid until October 12th 201919. On April 12th 2019, the Company’s subsidiary PDH Polska S.A. received a letter of intent from Hyundai Engineering Co, Ltd. (“Hyundai”) concerning potential involvement of Hyundai in the financing of PDHP’s planned Polimery Police project by making a contribution to PDHP’s share capital of up to USD 80m (the “Investment”). The Letter of Intent does not constitute a firm commitment by Hyundai to make the Investment. The Letter of Intent is valid until October 12th 201920.

15 For details, see Current Report No. 4/2019 of March 8th 2019 – Delayed disclosure of information – Proposed share capital increase at Grupa Azoty Zakłady Chemiczne Police. 16 For details, see Current Report No. 12/2019 of April 4th 2019 – Resolutions passed by Grupa Azoty Zakłady Chemiczne Police Extraordinary General Meeting on April 4th 2019. 17 For details, see Current Report No. 13/2019 of April 9th 2019 – Approval by Supervisory Board of Grupa Azoty Zakłady Chemiczne Police of acquisition of shares in PDH Polska. 18 For details, see Current Report No. 7/2019 of March 19th 2019 – Approval by PDH Polska Management Board of pre-selected bidder in Polimery Police project tender. 19 For details, see Current Report No. 14/2019 of April 12th 2019 – Receipt of letter of intent on financing of Polimery Police project. 20 For details, see Current Report No. 15/2019 of April 12th 2019 – Receipt of letter of intent on financing of Polimery Police project.

Grupa Azoty Zakłady Chemiczne Police Group Page 86 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

On April 18th 2019, the Management Board of PDH Polska S.A. passed a resolution to approve Hyundai Engineering Co., Ltd. as the finally selected bidder in the tender to award a contract for the execution of the Polimery Police project as the general contractor21.

On March 11th 2019, the environmental permit issued on January 31st 2019 by the Regional Director for Environmental Protection of Szczecin for the project named ‘Construction of the Polimery Police complex comprising a PDH unit, PP unit, PP logistics infrastructure, auxiliary facilities, inter-unit connections, and storage/handling terminal” became final.

21 For details, see Current Report No. 17/2019 of April 18th 2019 – Selection of general contractor for Polimery Police project by PDH Polska Management Board and opinion of Supervisory Board.

Grupa Azoty Zakłady Chemiczne Police Group Page 87 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Index of tables Tabela 1. Udział Jednostki Dominującej w jednostkach podporządkowanych na dzień 31 grudnia 2018 roku ...... 5 Tabela 2. Liczba pracowników zatrudnionych w Grupie Kapitałowej ...... 10 Tabela 3. Liczba pracowników zatrudnionych w Jednostce Dominującej ...... 10 Tabela 4. Liczba pracowników zatrudnionych w spółkach zależnych objętych konsolidacją* ..... 10 Tabela 5. Zatrudnienie średnioroczne i stan zatrudnienia na koniec 2018 roku w Grupie Kapitałowej ...... 10 Tabela 6. Zatrudnienie średnioroczne i stan zatrudnienia na koniec 2018 roku w Jednostce Dominującej ...... 10 Tabela 7. Zatrudnienie średnioroczne i stan zatrudnienia na koniec roku 2018 w spółkach zależnych objętych konsolidacją* ...... 10 Tabela 8. Rotacja kadr w Grupie Kapitałowej w okresie od 01 stycznia 2018 roku do 31 grudnia 2018 roku ...... 11 Tabela 9. Rotacja kadr w Jednostce Dominującej w okresie od 01 stycznia 2018 roku do 31 grudnia 2018 roku ...... 11 Tabela 10. Struktura zatrudnienia w Grupie Kapitałowej wg wykształcenia ...... 11 Tabela 11. Struktura zatrudnienia w Jednostce Dominującej wg wykształcenia ...... 11 Tabela 12. Struktura zatrudnienia w Grupie Kapitałowej wg stażu pracy ...... 11 Tabela 13. Struktura zatrudnienia w Jednostce Dominującej wg stażu pracy ...... 11 Tabela 14. Poziom produkcji kluczowych asortymentów Jednostki Dominującej [w tonach]...... 14 Tabela 15. Skonsolidowane przychody ze sprzedaży wg asortymentów ...... 14 Tabela 16. Umowy znaczące dla działalności Jednostki Dominującej ...... 16 Tabela 17. Wpływ utraty kontroli nad spółką zależną AFRIG S.A. na wyniki skonsolidowane ...... 24 Tabela 18. Wyniki finansowe Grupy Kapitałowej ...... 31 Tabela 19. Wyniki finansowe Jednostki Dominującej ...... 31 Tabela 20. EBIT w ujęciu segmentów za 2018 rok ...... 32 Tabela 21. Koszty Grupy Kapitałowej w układzie rodzajowym ...... 34 Tabela 22. Koszty Jednostki Dominującej w układzie rodzajowym ...... 35 Tabela 23. Struktura aktywów Grupy Kapitałowej ...... 35 Tabela 24. Struktura pasywów Grupy Kapitałowej ...... 36 Tabela 25. Struktura aktywów Jednostki Dominującej...... 37 Tabela 26. Struktura pasywów Jednostki Dominującej ...... 38 Tabela 27. Wskaźniki rentowności ...... 38 Tabela 28. Wskaźniki płynności...... 39 Tabela 29. Wskaźniki efektywności zarządzania ...... 39 Tabela 30. Wskaźniki zadłużenia ...... 39 Tabela 31. Poziom zobowiązań Grupy Kapitałowej z tytułu zaciągniętych kredytów wg stanu na dzień 31 grudnia 2018 roku* ...... 40 Tabela 32. Poziom zobowiązań Grupy Kapitałowej z tytułu zaciągniętych pożyczek od podmiotów powiązanych wg stanu na dzień 31 grudnia 2018 roku* ...... 41 Tabela 33. Poziom zobowiązań Grupy Kapitałowej z tytułu zaciągniętych pożyczek w finansowaniu pozabankowym wg stanu na dzień 31 grudnia 2018 roku* ...... 42 Tabela 34. Istotne umowy o finansowanie podpisane bądź aneksowane w 2018 roku oraz do dnia sporządzenia Sprawozdania ...... 43 Tabela 35. Poręczenia udzielone przez Jednostkę Dominującą na dzień 31 grudnia 2018 roku .... 44 Tabela 36. Gwarancje udzielone przez Jednostkę Dominującą w 2018 rokuBłąd! Nie zdefiniowano zakładki. Tabela 37. Gwarancje udzielone przez Jednostkę Dominującą wg stanu na 31 grudnia 2018 roku ...... 45 Tabela 38. Gwarancje udzielone przez spółki zależne Grupy Kapitałowej wg stanu na 31 grudnia 2018 roku ...... 45 Tabela 39. Gwarancje o najwyższej kwocie otrzymane przez Jednostkę Dominującą w 2018 roku ...... 46 Tabela 40. Gwarancje o najwyższej kwocie otrzymane przez Jednostkę Dominującą wg stanu na 31 grudnia 2018 roku ...... 46 Tabela 41. Gwarancje o najwyższej kwocie udzielone przez spółki zależne Grupy Kapitałowej wg stanu na 31 grudnia 2018 roku ...... 46

Grupa Azoty Zakłady Chemiczne Police Group Page 88 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

Tabela 42. Zestawienie stanu posiadania akcji Jednostki Dominującej przez osoby zarządzające Jednostką Dominującą ...... 56 Tabela 43. Kluczowe dane dotyczące notowań akcji Jednostki Dominującej ...... 57 Tabela 44. Rekomendacje dotyczące akcji Emitenta wydane w okresie od 01 stycznia 2018 roku do momentu publikacji niniejszego Sprawozdania ...... 57 Tabela 45. Struktura akcjonariatu na dzień sporządzenia Raportu ...... 65 Tabela 46. Struktura akcjonariatu na dzień 31 grudnia 2018 roku ...... 65 Tabela 47. Struktura akcjonariatu na dzień 31 grudnia 2017 roku ...... 66 Tabela 48. Wynagrodzenia Członków Zarządu z tytułu pełnienia funkcji w Jednostce Dominującej za okres 12 miesięcy 2018 roku ...... Błąd! Nie zdefiniowano zakładki. Tabela 49. Wynagrodzenia Członków Rady Nadzorczej z tytułu pełnienia funkcji w Jednostce Dominującej za okres 12 miesięcy 2018 roku ...... 75 Tabela 50. Wynagrodzenie biegłych rewidentów w odniesieniu do Jednostki Dominującej ...... 81 Tabela 51. Wynagrodzenie spółek Ernst & Young Audyt Polska Sp. z o.o. sp. k. oraz spółek z sieci w odniesieniu do jednostek zależnych Grupy Kapitałowej ...... 82 Tabela 52. Wynagrodzenie pozostałych biegłych rewidentów w odniesieniu do jednostek zależnych Grupy Kapitałowej ...... 82

Index of figures Rysunek 1. Schemat graficzny Grupy Kapitałowej na dzień 31 grudnia 2018 roku ...... 6 Rysunek 2. Schemat organizacyjny Jednostki Dominującej na dzień publikacji ...... 9 Rysunek 3. Struktura przychodów ze sprzedaży w rozbiciu na główne produkty i pozostałą sprzedaż ...... 14 Rysunek 4. Kierunki sprzedaży Grupy Kapitałowej w rozbiciu na regiony (wg przychodów ze sprzedaży)* ...... 15 Rysunek 5. Struktura poniesionych nakładów według rodzaju ...... 19 Rysunek 6. Notowania średniomiesięcznych cen nawozów NPK i DAP [USD/t] ...... 27 Rysunek 7. Notowania średniomiesięcznych cen amoniaku i mocznika [USD/t] ...... 28 Rysunek 8. Notowania średniomiesięcznych cen gazu ziemnego [EUR/MWh] ...... 29 Rysunek 9. Notowania średniomiesięcznych cen bieli tytanowej w 2018 roku [EUR/t] ...... 30 Rysunek 10. Przychody ze sprzedaży Grupy Kapitałowej według segmentów operacyjnych ...... 32 Rysunek 11. Struktura przychodów ze sprzedaży Grupy Kapitałowej według segmentów operacyjnych ...... 32 Rysunek 12. Porównanie skonsolidowanych przychodów ze sprzedaży w Segmencie Nawozy ...... 33 Rysunek 13. Porównanie skonsolidowanych przychodów ze sprzedaży w Segmencie Pigmenty ...... 34 Rysunek 14. Notowania i wolumeny akcji Spółki w 2018 roku ...... 57

Grupa Azoty Zakłady Chemiczne Police Group Page 89 of 90 Directors' Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 (all figures in PLN '000 unless otherwise stated)

This Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2018 contains 92 pages.

Signatures of Members of the Management Board

Signed with a qualified electronic signature Signed with a qualified electronic signature

………………………………………… ………………………………………… dr Wojciech Wardacki Tomasz Panas President of the Management Board Vice President of the Management Board

Signed with a qualified electronic signature Signed with a qualified electronic signature ………………………………………… ………………………………………… dr Włodzimierz Zasadzki Anna Tarocińska Vice President of the Management Board Member of the Management Board

Police, April 24th 2019

Grupa Azoty Zakłady Chemiczne Police Group Page 90 of 90