Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015

Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated)

Contents 1. General information on the Company ...... 4 1.1. Organisation ...... 4 1.2. Company organisational and equity ties ...... 5 1.3. Company’s branches (divisions) ...... 5 2. Management of the Company ...... 6 2.1. Organisational chart ...... 6 2.2. Changes in key management policies ...... 6 2.3. Organisational changes ...... 6 2.4. Workforce ...... 6 3. Business overview ...... 7 3.1. Basic information ...... 7 3.2. Overview of key products, goods and services ...... 9 3.3. Sales markets and supply sources ...... 10 3.4. Significant agreements ...... 12 3.5. Material related-party transactions on non-arm’s length terms...... 12 3.6. Significant events ...... 12 4. Strategy and development policy ...... 14 4.1. Strategy ...... 14 4.2. Directions of development ...... 14 4.3. Growth prospects and market strategy ...... 15 4.4. Key investments in Poland and abroad ...... 16 4.5. Key equity investments ...... 16 4.6. Feasibility of investment plans ...... 16 4.7. Significant R&D achievements ...... 17 4.8. Corporate Social Responsibility Policy ...... 17 5. Company’s current financial position ...... 17 5.1. Assessment of factors and non-typical events having a material impact on operations and financial performance ...... 17 5.2. Market overview ...... 18 5.3. Key financial and economic data ...... 20 5.3.1. Financial performance ...... 20 5.3.2. Segment results ...... 21 5.3.3. Operating expenses ...... 23 5.3.4. Structure of assets, equity and liabilities ...... 24 5.4. Financial ratios ...... 26 5.5. Explanation of differences between actual performance and financial forecasts for 2015 ...... 28 5.6. Management of capital and assets ...... 28 5.7. Bank deposits ...... 29 5.8. Borrowing agreements concluded or terminated during the financial year ...... 29 5.9. Loans advanced ...... 30 5.10. Sureties and guarantees received and issued ...... 31 5.11. Material off-balance-sheet items ...... 31 5.12. Financial instruments ...... 31 5.13. Forecast financial position ...... 32 6. Risks, threats and growth prospects ...... 32 6.1. Significant risk factors and threats ...... 32 6.1.1. Strategic management ...... 32 6.1.2. Technical and environmental safety ...... 32 6.1.3. Comprehensive customer support ...... 34 6.1.4. Availability of feedstocks and materials ...... 35 6.2. External and internal factors material to the Company’s growth ...... 36 6.2.1. External factors ...... 36 6.2.2. External factors ...... 36 7. Company shares and other securities and its major shareholders ...... 38 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 related entities ...... 38 7.2. Agreements known to the Company which may cause future changes in share percentages of existing shareholders and bondholders ...... 39

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7.3. Control systems for employee share ownership plans ...... 39 7.4. Treasury shares held by the Company and persons acting on its behalf ...... 39 7.5. Issue, redemption, and repayment of debt and equity securities ...... 39 7.6. Use of proceeds from share issues ...... 39 7.7. Company shares ...... 39 8. Statement of compliance with corporate governance principles ...... 41 8.1. Corporate governance code applicable to the Company and availability of the text of the code to the public ...... 41 8.2. Degree of the Company’s non-compliance with the corporate governance rules, specification of the rules not complied with, and reasons for the non-compliance ...... 41 8.3. Internal control and risk management systems ...... 43 8.4. Shareholding structure ...... 44 8.5. Special control powers of security holders ...... 45 8.6. Restrictions on voting rights ...... 45 8.7. Restrictions on the transferability of securities ...... 45 8.8. Rules governing appointment and removal from office of management personnel; powers of such personnel, including their authority to decide on the issue or buy-back of shares ...... 46 8.9. Rules governing amendments to the Company’s Articles of Association ...... 47 8.10. Operation of the General Meeting ...... 47 8.11. Composition, changes and operation of the Company’s management and supervisory bodies . 49 8.12. Remuneration and additional benefits ...... 52 8.13. Agreements between the Company and Management Board members ...... 53 8.14. Sponsorship, charitable and similar activities ...... 54 9. Other material information and events ...... 54 9.1. Audit firm ...... 54 9.2. Litigation ...... 54 9.3. Environmental performance ...... 55 9.4. Awards and distinctions ...... 56 10. Events after the end of the reporting period ...... 56

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1. General information on the Company 1.1. Organisation Name (company name): Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna Abbreviated name: Grupa Azoty Zakłady Chemiczne Police S.A. Registered office: Police Company address: 72-010 Police, ul. Kuźnicka 1 For 40 years, Grupa Azoty Zakłady Chemiczne Police S.A. (the “Company”) has been one of the leading European manufacturers of fertilizers, and is also one of the largest Polish exporters. The Company plays a key role in the economic and social well-being of the Szczecin province. Its core business is manufacture of chemical products in three Business Units: Fertilizers, Nitro, and Pigments. The Company is entered in the National Court Register maintained by the District Court for Szczecin-Centrum, 13th Commercial Division of the National Court Register, under entry No. KRS 0000015501 With its registered office in Police, at ul. Kuźnicka 1, the Company trades under the name Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna (abbreviated to Grupa Azoty Zakłady Chemiczne Police S.A.). The Company shares have been listed on the Warsaw Stock Exchange since July 14th 2005. In 2015, the Company’s performance figures more than doubled on 2014. It was also a period of many crucial initiatives, which are translating into the Company’s increased competitiveness, mainly due to implementation of strategic projects designed to develop target markets for the Fertilizers and Pigments Business Units and to reduce the costs of their operation. The changes initiated and implemented recently have helped to limit the impact of business cycles on the Company’s sales volumes and to improve its resilience to unfavourable external developments. Considering the effects already achieved and business results expected in the following years, a crucial factor was our consistent efforts to give effect to the operationalization of the Grupa Azoty Group’s strategy for 2014–2020. In 2015, the Company implemented the plan of strategic initiatives for its key business segments aiming to achieve the target ROCE of 14% in 2020, in line with the Grupa Azoty Group’s growth vision. The document ‘Grupa Azoty Group’s Strategy for 2014–2020 – Operationalisation’ focuses on three pillars: organic growth, operational excellence, and M&A. In 2015, the Company was gradually increasing the production and consumption of phosphates from Senegal. The Company holds 55% of shares in AFRIG S.A. of Senegal, which has access to phosphate rock and ilmenite sand deposits in that country. Thus, a substantial part of phosphates used for production were sourced at a lower cost from the Company’s own reserves in Senegal, which contributed directly to reducing the production costs. As a result, the supplies are uninterrupted, and the Company’s susceptibility to changes in market prices has been reduced. This investment in overseas feedstock reserves is the first of its kind in the Polish chemical sector. Up to one million tonnes of phosphorite can be shipped annually from Senegal to Poland. In 2016, the Company expects to further increase its production of phosphate rock. On September 10th 2015, PDH Polska Spółka Akcyjna of Police, with a share capital of PLN 60,000 thousand, was formed. The Company subscribed for 100% of its shares. The company was established in connection with the ‘PDH propylene production unit with infrastructure’ project. On September 24th 2015, PDH Polska Spółka Akcyjna was entered in the Business Register of the National Court Register. The main purpose of the project is to construct a propane dehydrogenation (PDH) unit with a target annual output of at least 400,000 tonnes of propylene. The launch of production is planned for 2019. The project is intended to diversify the structure of the Company’s revenue by creating new growth opportunities given the broad range of propylene processing options and the possibility of selling the product, which is in short supply on the market, to third- party customers. Under its contract policy, PDH Polska S.A. intends to structure the project work so as to ensure the broadest possible share of work areas that can be executed using the know-how of Polish companies.

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1.2. Company organisational and equity ties As at December 31st 2015, the Grupa Azoty Zakłady Chemiczne Police Group comprised Grupa Azoty Zakłady Chemiczne Police S.A. and: • nine subsidiaries (in which the Company held ownership interests above 50%), including one company in liquidation, • one indirect subsidiary, • two associates (in which the Company holds ownership interests below 50%), including one company in liquidation bankruptcy. Figure 1. Structure of the Group as at December 31st 2015:

Source: Company data. 1.3. Company’s branches (divisions) The Company does not operate any branches or divisions outside of its principal place of business.

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2. Management of the Company 2.1. Organisational chart Figure 2. Company organisational chart as at December 31st 2015

Source: Company data. 2.2. Changes in key management policies In 2015, there were no material changes in the Company’s key management policies. 2.3. Organisational changes In the reporting period, there were no material organisational changes. 2.4. Workforce Table 1. Number of employees As at As at Employee group Dec 31 2015 Dec 31 2014 Blue collar employees 1,646 1,681 White collar employees 697 699 Total 2,343 2,380

Table 2. Number of employees: average annual and as at the end of 2015 Employee group Average annual At year end

Blue collar employees 1,668 1,646 White collar employees 705 697 Total 2,373 2,343

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Table 3. Employee turnover from January 1st to December 31st 2015 2015 New hires 89 Redundancies -126 Total -37

Table 4. Employment by summary education University Total Item Year or Secondary Vocational Primary employment equivalent Number of employees 2015 2,343 611 972 560 200 Number of employees 2014 2,380 605 947 598 230

Table 5. Employment by length of service over 20 Item Year up to 5 years 6-10 years 11-20 years years 162 240 468 1,473 Number of employees 2015 7% 10% 20% 63% 143 302 415 1,520 Number of employees 2014 6% 13% 17% 64%

3. Business overview 3.1. Basic information The Company is the top chemical producer in the region and a significant one in the EU. Currently, the Company operates in three segments: Fertilizers, Pigments and Other, through three business units and four support centres: • 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 Grupa Azoty Zakłady Chemiczne Police S.A. in terms of revenue and production volumes. The output includes compound NP, NPK and NS fertilizers, as well as phosphoric and sulfuric acids. The Company 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). 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 synonym for compound fertilizers in Poland, evoking superior quality and highest performance. 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 NOXy® (AdBlue®), a urea solution used in the automotive industry to reduce nitric oxides in diesel

Grupa Azoty Zakłady Chemiczne Police S.A. Page 7 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) engines. With tightening standards for nitric oxide emissions under EU directives, the European market of NOXy® (AdBlue®) is expected to grow steadily in the coming years. The Nitro Business Unit’s product range is complemented by Likam® (ammonia water). 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. The Unit is the leader in the domestic market of titanium white and 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. The pigments are highly sought after due to their versatility, efficiency, durability, safety in use and non-toxic nature, and their associated products have excellent aesthetic and protective properties. Applications of titanium white include the production of paints and varnishes, printing inks, plastics, papers and laminated materials. The consistent 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, and also 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, hot steam and heating water as well as fly ash to external customers, and is also responsible for energy management across the organisation. In addition to this, the Centre generates electricity using high-efficiency co-generation technology, and therefore obtains certificates of origin from co-generation, which are transferable property rights. Logistics Centre The Logistics Centre is responsible for shipping and transport, packaging and distribution, and the operation and maintenance of port infrastructure. In the transport processes, it is important to ensure continuity of supplies, product dispatch handling, 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 for ammonia and sulfuric acid. The packaging process involves efficient fertilizer packaging, storage 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 manages technical infrastructure, auxiliary utility production and distribution, wastewater treatment and waste landfilling. It supports comprehensive management of land, buildings and structures. In production asset management, the Centre carries out inspections required under applicable laws and standards, and manages repairs and maintenance. It is also responsible for procurement and storage of technical materials. The Centre’s operations are environmentally friendly, as evidenced by rare flora and fauna species found in areas adjacent to the Company’s wastewater treatment plant and phosphogypsum landfill unit. Laboratory Analysis Centre The Laboratory Analysis Centre satisfies all needs of internal customers regarding chemical analyses of feedstock/raw material supplies, implementation of technological processes, quality assessment of semi-finished and finished goods, environmental protection issues, OHS, and implementation of new technical and technological solutions. The Centre also provides similar laboratory services to the Company’s external customers. The Laboratory Analysis Centre operates in accordance with the Integrated Management System in place at the Company based on PN-EN ISO 9001 and PN-EN ISO 14001, PN-EN ISO 18001 and PN-EN ISO/IEC 17025:2005.

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3.2. Overview of key products, goods and services The Company’s core 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 operations comprise the manufacture of other inorganic basic chemicals (PKD 20.13.Z) and the manufacture of other chemical products not elsewhere classified (PKD 20.59.Z). In addition, the Company’s Articles of Association provide for the conduct of any activities necessary to ensure proper operation of its business, including procurement of raw materials, as well as product distribution and sales. The Company’s main commercial products include: • compound fertilizers - NP1 (MAP, DAP) and NPK2 mineral fertilizers manufactured using mono- and bi-ammonium phosphate and potassium salt, with secondary nutrient additives (sulfur, magnesium) and microelements • NS fertilizer - nitrogen-based fertilizer with sulfur and magnesium, a granulated mixture of ammonia sulphate, urea and magnesite • nitrogen fertilizer - urea • liquid ammonia • titanium white - a group of titanium dioxide-based white dyes. The Company 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, the Company also manufactures: • 32.5% aqueous urea solution for automotive applications - NOXy™ (AdBlue®) and crystalline urea for its production, • hexafluorosilicic acid, • dried iron (II) sulfate.

2015 production Table 6. Company’s production volume by product [tonnes] 2015 2014 Product production production % change volume volume NPK 862,975 686,384 25.7% NP 213,669 200,512 6.6% NS 51,176 41,358 23.7% Urea 361,845 362,485 -0.2% Ammonia 517,695 508,333 1.8% Titanium white 31,716 36,001 -11.9% AdBlue 105,358 82,863 27.1% Sulfuric acid 701,700 591,850 18.6% Phosphoric acid 357,982 300,153 19.3%

2015 sales Table 7. Revenue by segment Segment 2015 2014 % change Fertilizers 2,418,247 2,042,567 18.4% Pigments 269,478 299,746 -10.1% Other 33,915 34,450 -1.6% Total revenue 2,721,640 2,376,763 14.5%

NP fertilizers - compound fertilizers with two primary nutrients: nitrogen (N) and phosphorus (P)1 NPK fertilizers - compound fertilizers with three primary nutrients: nitrogen (N) , phosphorus (P) and potassium (K)2

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The 2015 revenue totalled PLN 2,721,640 thousand and increased by PLN 344,877 thousand (14.5%) on 2014. The highest sales were recorded in the case of compound fertilizers and urea, which jointly generated PLN 2,045,350 thousand in revenue, accounting for 74% of total sales. Figure 3. Revenue by main product groups and other sales NOXy® (AdBlue®) Other 2% NS Titanium white; 3% 2% 9% NPK 46%

Urea 13% NP 14%

Source: Company data. 3.3. Sales markets and supply sources Domestic sales of the Company’s products and services in the reporting period totalled PLN 1,596,529 thousand, up by 14% compared with 2014. The share of exports in the 2015 revenue (41%) rose by 1pp compared with the previous year. Domestic and export sales accounted respectively for 61% and 39% of total fertilizer sales. Key export markets included Venezuela, Germany, United Kingdom, Denmark, Czech Republic and Colombia. Combined sales to those countries accounted for 79% of total export sales. The domestic share of titanium white sales was 47%, while product exports made up the remaining 53%. Key export markets included Germany, Italy and France. Combined sales to those countries accounted for 63% of total export sales. Foreign sales of chemicals accounted for 47% of total export sales, with key export markets being Sweden, Germany, Spain, Belgium and Slovakia. Combined sales to those countries accounted for 87% of total export sales.

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Figure 4. 2015 sales by geographical regions South America Africa Other countries ; 10% 1% 1%

Germany 11%

Other EU Poland countries; 18% 59%

Source: Company data. No customer accounted for more than 10% of the Company’s revenue in 2015. In the case of suppliers, only PGNIG S.A., a gas fuel supplier, and Uralkali Trading S.A., a supplier of potassium chloride, exceeded the 10% threshold (accounting respectively for 14.4% and 10.2% of the Company’s revenue). Sources of strategic raw materials 2015 saw an increase in prices of main raw materials for fertilizer production (phosphorites, potassium salt, sulfur and sulfuric acid). There was a downward trend, however, in prices of natural gas and titanium-containing raw materials used to manufacture titanium white. Phosphorites In 2015, phosphorites were mainly procured from Morocco, Algeria and Senegal, with supplementary supplies coming from Israel. Since 2013, phosphorites have also been supplied from the Company’s own sources in Senegal. Access to its own phosphorite deposits has considerably improved the Company’s security in terms of feedstock supplies, reducing its dependence on external suppliers and reinforcing its negotiating position. Potassium chloride In 2015, the Company relied on its traditional sources of potassium chloride supply. It was procured mainly from Russia (about 93% from the main supplier: Uralkali Trading S.A., and Uralkali Trading SIA). The potassium chloride stock was also replenished through purchases in Germany. Ilmenite and titanium slag In 2015, the main source of ilmenite was still Norway (88% of the total purchase volume). The Company continued to seek alternative suppliers of ilmenite from India, Ukraine and Kenya, which accounted for the remaining 12% of the purchase volume. All supplies of titanium slag were made from Norway. Natural gas In 2015, the Company continued to diversify its natural gas supply sources. In addition to the gas volumes delivered by PGNiG S.A., the Company procured natural gas from the European market, with supplementary purchased made on the Polish Power Exchange. Overall, in 2015, the proportions of the respective gas supply sources were as follows: PGNiG S.A. − 71%, EU market − 29%, and PPE − 0.31%. In comparison with 2014, the average purchase price of natural gas fell by 12%.

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3.4. Significant agreements Table 8.8 Agreements significant for the Company’s business Agreement Date and number Party Subject matter Value date of current report Feb 12 2015 Uralkali Trading Purchase of potassium Feb 12 2015 Current Report 250,000 S.A. chloride No. 4/2015 Sep 23 2015 PST PGNiG Sales & 160,000 Supply of gaseous fuel Sep 23 2015 Current Report Trading GmbH No. 24/2015 (214,000)* Nov 24 2015 Sale of compound 126,355 Hokr s r.o. Nov 23 2015 Current Report fertilizers and ammonia No. 27/2015 (153,569)* Nov 24 2015 Sale of compound Witt Handel GmbH Nov 24 2015 Current Report 480,815 fertilizers and ammonia No. 28/2015 Dec 08 2015 Sale of compound Metrac HmbH Dec 08 2015 Current Report 305,269 fertilizers and ammonia No. 29/2015 Dec 17 2015 Sale of compound Beiselen GmbH Dec 17 2015 Current Report 198,968 fertilizers and ammonia No. 30/2015

* Total value of contracts signed over the last 12 months or from the submission date of the last current report concerning agreements with this entity. 3.5. Material related-party transactions on non-arm’s length terms In 2015, the Company did not enter into any related-party transactions on non-arm’s length terms. 3.6. Significant events Key investment project On March 27th 2015, the Company announced plans to build Europe’s largest and most advanced PDH propylene production unit in Police. Worth PLN 1.7bn, the project involves the construction of a propylene production unit, a power generating units, and extension of the Police port facilities to include a liquid chemicals handling terminal. Ultimately, the terminal will be able to receive largest LPG vessels in Poland, with its capacity expected to double. The project is scheduled for completion within the next four years, and its first positive contribution to the financial performance is expected as early as 2019. The new project is expected to ultimately add about PLN 2bn to the Group’s revenue and hundreds of millions to its earnings. Some 1,000 staff will work on the project construction site and, once it comes on stream, the plant will provide permanent employment to approximately 200 people. The PDH technology will be supplied by UOP LLC (a Honeywell company), a global supplier of most innovative industrial solutions. On May 11th 2015, a Basic Engineering Package was signed, including licensing, warranty and engineering services agreements. Basic Engineering is the first phase of project implementation, following concept development and feasibility study. It consists in formulating the concept of a complex process involving material balances, flow diagrams and preliminary unit designs. The Company believes that the selected technology supplier will ensure the highest quality and efficiency of propylene production, with no environmental footprint. The PDH unit not only represents the Group’s flagship project, but it will also be an exemplary and most technologically advanced installation of its kind in Europe.3

3 The Company disclosed this information in Current Report No. 5/2015 ‘Delayed disclosure of inside information’ of March 27th 2015.

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Merger of subsidiaries On April 1st 2015, the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. passed a resolution to approve the merger of Remech Sp. z o.o. and Automatika Sp. z o.o. in accordance with Art. 492.1.1 of the Commercial Companies Code, through the transfer of all assets of Automatika Sp. z o.o. (the target) to Remech Sp. z o.o. (the acquirer). On June 1st 2015, the following were entered in the Business Register of the National Court Register: • merger of Remech Sp. z o.o. and Automatika Sp. z o.o., effected under Art. 492.1.1 of the Commercial Companies Code, i.e. through the transfer of all assets of Automatika Sp. z o.o. (the target) to Remech Sp. z o.o. (the acquirer). • change of name of Remech Grupa Remontowo-Inwestycyjna Spółka z ograniczoną odpowiedzialnością to Grupa Azoty Police Serwis Spółka z ograniczoną odpowiedzialnością. Cooperation agreement On May 19th 2015, the Company, Polskie Inwestycje Rozwojowe S.A. (“PIR”) and Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. (“GA Kędzierzyn”) executed a Cooperation Agreement, where the parties expressed their intent to collaborate on feasibility assessment of joint implementation of a project called “PDH propylene production unit with infrastructure”. Under the Agreement: • the Company agreed to propose the structure of the Project and its financing, including the partners’ participation in the financing, and to present the proposal to PIR and GA Kędzierzyn, • PIR agreed to carry out a preliminary analysis of the Project structure and its financing, and to seek a preliminary investment decision from the PIR Supervisory Board, • GA Kędzierzyn agreed to carry out a preliminary analysis of the Project structure and its financing, and to make a preliminary investment decision. Negotiations of a detailed Cooperation Agreement will commence after PIR or Grupa Azoty Kędzierzyn has obtained a positive preliminary investment decision and after the terms and conditions of that decision have been provisionally accepted by the Company4. Profit distribution On May 27th 2015, the Annual General Meeting passed a resolution to distribute PLN 42,000 thousand as dividend for 2014. The dividend record date and the dividend payment date were set for June 11th 2015 and June 25th 2015, respectively. On May 27th 2015, the Annual General Meeting of Kemipol Sp. z o.o. (an associate) resolved to distribute dividend for 2014. The dividend amounted to PLN 11,035 thousand and was paid on June 30th 2015.5 Establishment of PDH Polska S.A. On August 31st 2015, the Company’s Management Board passed a resolution to approve the establishment by the Company of a joint-stock company based in Police and the subscription of 100% of shares in its share capital. On September 10th 2015, PDH Polska Spółka Akcyjna of Police, with a share capital of PLN 60,000 thousand, was formed. The Company subscribed for 100% of its shares. The company was established in connection with the ‘PDH propylene production unit with infrastructure’ project. On September 24th 2015, PDH Polska Spółka Akcyjna was entered in the Business Register of the National Court Register.6

4 The Company disclosed this information in Current Report No. 4/2015 ‘Execution of a significant agreement’, dated February 12th 2015. 5 The Company disclosed this information in Current Report No. 16/2015 ‘Payment of dividend for 2014’, dated May 27th 2015. 6 The Company disclosed this information in Current Report No. 23/2015 ‘Establishment of PDH Polska Spółka Akcyjna.’, dated August 31st 2015.

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4. Strategy and development policy 4.1. Strategy The 2013−2020 Strategy of the Grupa Azoty Group was published in June 2012. The Group manufactures and sells products for agriculture (mineral fertilizers), technologically-advanced materials (engineering plastics), and organic and non-organic chemicals. In 2015, the Company carried out strategic projects to support the development of the target markets for the Fertilizers and Pigments Business Units, as well as to reduce their operating expenses and thus enhance the Company’s competitive edge. The changes initiated and implemented recently helped to limit the impact of business cycles on the Company’s sales volumes and to improve its resilience to unfavourable external developments. 4.2. Directions of development The outcomes of the consistently pursued strategy confirm that the business targets planned for the coming years are attainable. To ensure that the planned measures are as effective as possible, in 2014 the ‘Strategy of the Grupa Azoty Group for 2014-2020 − Operationalisation’ was formulated. It focused on three pillars: operational excellence, organic growth, and mergers and acquisitions. Operational excellence In 2014, the Operational Excellence Programme (Azoty PRO) was launched. Azoty PRO is the Company’s internal development programme designed to ensure the best possible use of the Company’s assets and human resources. Its ultimate goal is to produce long-term improvement in product competitiveness. The first stage of the Operational Excellence Programme covers the period from 2014 to 2017. The most important achievements were made thanks to the following initiatives: Preventive Maintenance and TPM, reduction of gas consumption costs, implementation of uniform rules for managing coal stocks, work organisation efficiency enhancement, and improvement of administrative staff work organisation. Organic growth Efforts directed towards organic growth comprise a number of initiatives in the Fertilizers and Pigments Segments. In 2015, the following projects were carried out in the Fertilizers Segment: • the ammonia unit was upgraded to reduce the energy consumption of the ammonia production process and to increase production capacities, • the phosphoric acid unit was upgraded to enhance production efficiency and improve the quality of the output phosphoric acid, • the logistics infrastructure was developed to not only increase the fertilizer packing capacities and streamline the loading and forwarding of pallets with fertilizers, but also to markedly increase the storage capacity for finished products. In 2014 and 2015, the strategy of the Pigments Business Unit was updated. Following an update of the strategic analysis, it was decided that the original objectives of increasing the share of the strategic customer segment in sales and focusing on the European market would be pursued further. Due to the continued challenging market landscape, a cost restructuring plan for the Pigments Business Unit was formulated. It has been gradually implemented since Q3 2015. Scientific research plays a fundamental role in the development of any business, as it provides knowledge and skills necessary to develop innovative products and processes or to improve the existing ones. The Company attaches an increasingly greater importance to scientific research, as evidenced by the expenditure on research and development growing year by year. Key R&D projects in 2015: • Improvement of the phosphoric acid quality, • Environmental assessment of fertilizer lifespan, • Investigation into the marketability of a new liquid fertilizer, • Development of a new type of titanium white to be used in plastics, • Analysis of the possibility of producing NOXy solution directly from urea solution discharged from the synthesis unit,

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• Development of a coal gasification technology for highly effective production of fuels and electricity, as well as a study of CO2 removal processes in chemical looping (jointly with Grupa Azoty S.A.). The implementation of the PDH project deserves particular attention. It is intended to diversify the structure of the Company’s revenue by using the broad range of propylene processing options and selling propylene, which is in short supply on the market, to external customers. Under its contract policy, PDH Polska S.A. intends to structure the project work so as to ensure the broadest possible share of work areas that can be executed using the know-how of Polish companies. The project is connected with the construction of a terminal for deliveries of feedstock for propylene production. It is scheduled to be completed by December 31st 2018. 4.3. Growth prospects and market strategy In the coming years, the Company will endeavour to strengthen its value by seeking out new business opportunities and further reinforcing its competitive advantage. More specifically, the Company will strive to accomplish the following: • optimise its operating expenses and financing structure, • increase the utilisation of its units, including through reliability and efficiency improvement, • reduce the consumption of strategic feedstocks and utilities used in production processes, • ensure compliance with environmental and technical safety requirements, • streamline inventory management processes, • develop technologies and ensure efficient project delivery, • streamline logistics processes, • increase the efficiency of support processes, • increase the value of intellectual property, and • use its assets in the most optimal way. Growth prospects at the Company are analysed with reference to individual business units as they operate in different marketplaces, have different customer bases, offer different product ranges, and face different challenges resulting from trends and legal environments relevant to their respective business segments. Fertilizer market Developments in the mineral fertilizer segment, the largest area of the Company’s activity, are of key importance for its business. They are driven by the strategy of market penetration and intensification of efforts in primary markets in Poland and Germany based on the existing product portfolio. The Company is consistently adding new products to its mix of liquid and specialty fertilizers, and other products and services for the agricultural sector. Additionally, it has partnered with a research institute to work on non-toxic phosphate pigments. The objective of product portfolio development is to provide a comprehensive range of fertilizers based on phosphorous and potassium. Implementation of this strategy requires continued efforts to ensure cost-efficiency of the business. The company will maintain its presence on distant markets, in particular in Senegal, where the company recently acquired its own deposits of phosphate rock. Ammonia and urea market A number of investment projects will be carried out in the Nitro Business Unit to improve its cost efficiency. The upgraded, more power-efficient, ammonia unit, will maintain its competitiveness and minimise the costs associated with CO2 emissions. The scope of upgrade work will bring about more production capacity and efficiency. The modernised urea unit will be more efficient and will maintain compliance with BAT environmental requirements. Titanium white market In the titanium white market, a further growth is expected of its globalisation potential. Acquisition of ilmenite (a strategic raw material for the segment) deposits in Senegal is being considered to significantly improve the cost efficiency of the Pigments segment. Currently, the Company is considering making changes to its product portfolio to include new types of titanium white suitable for the needs of the plastics industry, with high weather resistance and appropriate optical properties.

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The strategy intends to deliver ROCE at a level set by the Grupa Azoty Group’s objectives, and includes efforts to maintain stable sales of this product group by focusing primarily on strategic customers in the target markets of Poland and Germany. 4.4. Key investments in Poland and abroad In 2015, the Company’s expenditure on property, plant and equipment and intangible assets was PLN 242,771 thousand. Capital expenditure was PLN 187,024thousand, and comprised: • business development: PLN 111,785 thousand, • business continuity: PLN 18,425 thousand, • mandatory expenditure: PLN 33,180 thousand, • purchase of finished goods: PLN 18,110 thousand. and the balance was spent on significant overhaul work. Figure 5.5 Structure of expenditure by project type Purchase of Business finished goods continuity 10% 10% Business development 62%

Source: Company data. In 2015, 53 new investment projects were launched. Key projects included: • Modernisation of the floodbank around the phosphogypsum landfill site, • Alteration of the raw material (phosphate rock) storage facility, • Remote (online) monitoring of physical and chemical parameters of liquids at production units. In 2015, the Company continued to work on 17 investment projects commenced in previous years, including: • Exhaust gas treatment unit and upgrade of the EC II CHP plant, • Upgrade of the ammonia unit, • Change of the DA-HF phosphoric acid production technology. In 2015, the Company completed 35 projects, including: • Upgrade of internal road no. 3 from route A to route E. Project completed in December 2015. • Installation of a system for protecting products against secondary moisture Project completed in December 2015. 4.5. Key equity investments On August 31st 2015, the Company Supervisory Board passed a resolution to approve the establishment by Grupa Azoty Zakłady Chemiczne Police S.A. of PDH Polska Spółka Akcyjna, a joint- stock company based in Police, and subscription for 100% of shares in its share capital. The share capital of PDH Polska Spółka Akcyjna of Police amounts to PLN 60m. The company was established in connection with the project to construct the ‘PDH propylene production unit with infrastructure’. On September 24th 2015, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered PDH Polska Spółka Akcyjna. 4.6. Feasibility of investment plans The planned investments will be financed mainly with current assets and funds available under intragroup financing agreements. Funds for some projects will come from preferential external

Grupa Azoty Zakłady Chemiczne Police S.A. Page 16 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) sources other than banks, such as EU funds or national support programmes. The funds will be appropriated mainly for projects designed to protect the environment. 4.7. Significant R&D achievements Development projects are a prominent element of business strategies. Development programmes are formulated based on a thorough analysis of the company’s needs and market preferences. In 2015, the Company’s expenditure on research and development work exceeded PLN 5,590 thousand. The Company’s efforts in this area concentrated on: • laboratory research and quarter-technical analyses, • feasibility studies, expert investigation and analyses. The work was conducted mostly in cooperation with other Polish and foreign organisations and institutions. Apart from new R&D work, projects launched in 2014 continued throughout 2015. The list below summarises the most important R&D projects: • Feasibility study for upgrade of the post-hydrolytic sulfuric acid concentration unit, • Investigation into the possibility of recovering phosphorous from a phosphogypsum landfill site leachate, • Research into phosphoric acid quality improvement, • Analysis of environmental assessment of fertilizer lifespan, • Research into a new liquid fertilizer to be produced based on urea and ammonia sulfate derived from post-crystallization acid and assessment of its marketability, • Application tests on a new type of titanium white to be used in plastics, • Analysis of the possibility of producing NOXy solution directly from urea solution discharged from the synthesis unit. 4.8. Corporate Social Responsibility Policy The Company takes CSR issues very seriously, engaging in projects supporting local communities and regional development. A socially responsible business cares about all its stakeholders. The Company seeks to respond to the needs of its employees, shareholders, business partners, customers and local communities. As part of its efforts to operate in a responsible and reliable manner, the Company adopted the ‘Grupa Azoty Group’s Code of Ethical Conduct’, which defines the expected behaviour and practices. The document presents the values and standards essential for ethical business, as well as the principles to be followed by the Group’s employees in their daily work. The Company, together with other companies of the Grupa Azoty Group, published the Integrated Report compliant with the Global Reporting Initiative G4 standards. This reporting framework gives a complete picture of the business − not only its financial performance but, most importantly, its environmental and social aspects. Environmental protection is a major element of corporate social responsibility. In 2016, the Company will celebrate 20 years of its participation in the Responsible Care programme, focused on environmental, health, safety and security performance.

5. Company’s current financial position 5.1. Assessment of factors and non-typical events having a material impact on operations and financial performance Domestic, European and global factors with the largest impact on performance in 2015: • high grain yields and high global inventory levels, • low agricultural produce prices, • crisis in the dairy industry and pig farming, • extensive drought in Poland preventing winter crops from being sown on time in autumn, • economic slowdown in Europe and China depressing titanium white demand, • considerable increase in global ammonia and urea production capacities, • lower prices of gas – a key raw material in ammonia production.

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5.2. Market overview NPK and DAP fertilizers In 2015, the Polish NPK market was marked by pronounced seasonal fluctuations. The increase in prices of certain agricultural produce (wheat, rapeseed) and disbursement of direct subsidies pushed up retail sales of fertilizers ahead of spring. Demand picked up again in August and September before the sowing of winter crops. However, the drought which hit many regions of Poland prevented the sowing of numerous winter crops, particularly rapeseed. As a result, acreage and demand for fertilizers went down. Due to many farms’ poor liquidity, payments for purchased fertilizers were increasingly often postponed until much later dates, e.g. until the 2016 harvest. In Western Europe, apart from short seasonal increases in purchasing, sales of compound NPK fertilizers were lower for the majority of 2015 than in 2014. Although market prices of NPK fertilizers remained broadly flat, the price of the standard 16-16-16 NPK fertilizer declined by approximately 5% in 2015. In the second half of the year, uncertainty about the condition of winter crops, low grain prices, and high inventory levels of grains and fertilizers discouraged European farmers from purchasing larger amounts of NPK fertilizers. Throughout most of 2015, the price of the 18-46 NP compound fertilizer (POLIDAP®) on global markets remained under constant pressure, primarily due to insufficient demand. The price went down some 20% in the course of the year, while the low prices of agricultural produce, currency depreciations and adverse weather conditions limited the fertilizer’s sales on many markets. 2015 saw different fluctuations in the prices of raw materials used in the production of NPK compound fertilizers. In H1 2015, potassium salt and phosphate prices increased moderately. The decline in compound fertilizer prices translated into pressure on the prices of raw materials used in their production. In H2 2015, phosphate prices remained unchanged, while those of potassium salt were down 13%. Sulfur prices declined from the beginning of 2015, with the total change for the year amounting to 13%. Figure 6. Monthly average prices of NPK and DAP fertilizers in 2015 [USD/t] 600 500 400 300 200 100 0

DAP NPK

Source: Company data. Ammonia and urea Ammonia prices continued to decline throughout 2015 despite periodic increases caused by seasonal upturns in demand. Signals for price reductions came mainly from the US. In 2015, the market price of ammonia went down by approximately 40%. The supply and demand relation was significantly affected by a decline in output caused by disrupted gas supplies and plant failures, as well as the launch of new production units in Saudi Arabia, Qatar, Algeria and the US. After a years-long break, the US, which is the word’s largest ammonia importer, put forward its first offers to export the product. At the end of the year, several ammonia manufacturers halted production due to the overfilling of storage tanks and lack of demand. In 2016, ammonia prices may be under pressure following the planned launch of new production units.

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The oversupply of ammonia from China, Iran, Russia, the Persian Gulf and North Africa, combined with certain macroeconomic factors such as low prices of agricultural produce, high grain stocks and the turmoil on the financial markets, supported the downward price trend throughout 2015. The decrease was most strongly driven by higher supply. In 2015, the already excessive urea production capacities increased by a total of more than 4 million tonnes per annum. In all of 2015, urea prices declined by approximately 30%. New urea production units will be launched in 2016, deepening the already considerable imbalance on the market. Figure 7. Monthly average prices of ammonia and urea in 2015 [USD/t] 700 600 500 400 300 200 100 0

Urea Ammonia

Source: Company data. Titanium white Titanium white demand is correlated with economic growth. Because of the global economic downturn, titanium white demand continued to decline. The challenging economic climate in the US and Europe was aggravated by stock market turmoil and slower economic growth in China. The global oversupply of titanium white (compared to existing demand) drove the market prices down throughout 2015. On the European markets, the decline in 2015 amounted to 11%. In H2 2015, two of the world’s largest manufacturers (DuPont and Huntsman) permanently shut down a number of production lines. Also in China (accounting for 35% of global titanium white output), production operations were suspended by several manufacturers and limited by most. Given the lack of prospects of a significant economic revival, forecasts for H1 2016 indicate further titanium white price corrections. A minor, seasonal increase in demand is anticipated in Q3. Figure 8.8 Monthly average prices of titanium white in 2015 [EUR/t] 2 350 2 300 2 250 2 200 2 150 2 100 2 050 2 000 1 950

Titanium white

Source: Company data. Chemicals Ammonia is among the Company’s key chemicals. In 2015, a downturn trend in this product’s price was observed on global markets following a decline in the demand for fertilizer and technical grade

Grupa Azoty Zakłady Chemiczne Police S.A. Page 19 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) ammonia. However, the principal cause of the decrease was considerable higher production capacities. Output reduction by a number of major exporters failed to check the price decline. Technical grade urea is used mainly to produce glues for the furniture industry and to prepare the NOXY® (AdBlue®) solution. In 2015, the demand for urea used in glue production was stable. The demand for NOXY® (AdBlue®) depends on the number of vehicles fitted with catalytic converters and industrial facilities using NOXY®(AdBlue®) for flue gas treatment. Growth in the product’s consumption in 2015 was limited due to the economic slowdown, lower volume of transport compared to 2014, and a lower number of new cars and industrial facilities placed in service. Intensive competition was seen on export markets, particularly the German one, which had an impact on the product’s prices and profitability. 5.3. Key financial and economic data 5.3.1. Financial performance The Company’s key achievements in 2015 included: • EBIT and net profit more than two times higher than in 2014, • ROCE at 14% (the Grupa Azoty Group strategy envisages target ROCE of 14% by 2020), • Higher EBIT margin and net profit margin, • Higher sale of compound fertilizers, • Substantial decline in production costs due to constantly growing phosphate supplies from the Company’s own source (a subsidiary in Senegal) and lower prices negotiated on key raw materials, • Dividend payment of PLN 42,000 thousand. In 2015, the Company generated net profit of PLN 168,788 thousand, with EBIT of PLN 213,612 thousand and EBITDA of PLN 296,236 thousand. Compared with 2014, net profit rose by PLN 86,111 thousand (104%), while EBIT improved by PLN 112,491 thousand (111%). In the reporting period, the Company’s financial performance was strongly correlated with the market environment. In 2015, the Company conducted intensive negotiations to lower production costs, which led to a marked reduction in the price of the key raw material – natural gas – and better financial performance. Table 9.9 Company’s financial performance Item 2015 2014 change % change Revenue 2,721,640 2,376,763 344,877 15 Cost of sales 2,253,742 2,062,619 191,123 9 Gross profit 467,898 314,144 153,754 49 Selling and distribution expenses 97,664 84,885 12,779 15 Administrative expenses 156,698 142,353 14,345 10 Net profit on sales 213,536 86,906 126,630 146 Other income/(expenses) 76 14,215 -14,139 -99 EBIT 213,612 101,121 112,491 111 Finance income/(costs) -5,459 703 -6,162 -877 Profit before tax 208,153 101,824 106,329 104 Income tax 39,365 19,147 20,218 106 Net profit/loss 168,788 82,677 86,111 104

In 2015, revenue was higher by 15% year on year, whereas the EBITDA margin of 11% was up by 3pp relative to 2014. The revenue was driven up by increased sales volumes for fertilizers (urea and compound fertilizers). Selling and distribution costs were up on 2014 due to higher sales volumes. Also there was an increased number of transactions in which the Company was tasked to handle transport logistics.

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Net finance income/cost went down year on year and was negative at PLN -5,459 thousand. The decrease was due to lower interest on trade receivables and lower dividends. 5.3.2. Segment results In 2015, EBIT in the Fertilizers Segment was positive at PLN 221,578 thousand. Given a difficult market situation, EBIT in the Pigments Segments was negative at PLN -13,351 thousand. The Fertilizers Segment accounted for a higher share of the Company’s revenue (89%). The Pigments Segment generated 10% of the total revenue, while revenue from Other Activities represented 1% of the Company’s total revenue from external sales. In 2015, operating profit posted in the Fertilizers Segment was 201% higher than in the previous year. The improvement was driven mainly by the increased sales volume. At the same time, in 2015 the market was affected by lower prices of titanium white and NS fertilizers. EBIT generated by the Pigments Segments was down by PLN 25,932 thousand relative to 2014. Titanium white sales continued to decline in 2015. Other Activities yielded a positive EBIT of PLN 5,385 thousand, down by 64% year on year.

Table 10.10 EBIT by segment in 2015 Other Item Fertilizers Pigments Activities Revenue from external sales 2,418,247 269,477 33,916 Share [%] 89% 10% 1% EBIT 221,578 -13,351 5,385

Table 11.11 EBIT by segment in 2014 Other Item Fertilizers Pigments Activities Revenue from external sales 2,042,568 299,746 34,449 Share [%] 86% 13% 1% EBIT 73,589 12,581 14,951

In 2015, the Fertilizers Segment’s share in the Company’s revenue increased by 3pp, while the Pigments Segment’s share declined. Figure 9. Revenue by segment

2 400 000

2 000 000 2015 1 600 000 2014

1 200 000

Fertilizers 800 000 Pigments 400 000 Other Activities 0

Source: Company data. Fertilizers In 2015, revenue of the Fertilizers Segment was PLN 2,418,247 thousand, a marked improvement on 2014 (by 18%). The increase was predominantly due to higher sales volumes and fertilizer prices. Sales of compound fertilizers were 29% higher than in 2014.

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Figure 10. Revenue of the Fertilizers Segment 700 000 600 000 500 000 400 000 300 000 200 000 100 000 0

Source: Company data. Pigments In 2015, revenue from external sales posted by the Pigments Segment was PLN 269,477 thousand, down 10% on 2014. The key product sold by the Pigments Segment is titanium white. In 2015, the Segment’s revenue from sales of titanium white reached PLN 258,559 thousand. Key factors behind the year-on-year drop in revenue of the Pigments Segment included a decrease in domestic sales volumes of titanium white and a 7% drop in average selling prices. Figure 11. Revenue of the Pigments Segment 120 000 100 000 80 000 60 000 40 000 20 000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2014 2014 2014 2015 2015 2015 2015

Source: Company data. Other Revenue of the Other Activities segment accounts for 1% of the Company’s total external sales and is derived mainly from occasional sales of merchandise and services. Sales by product group Relative to 2014, the Company posted a 15% increase in revenue. In 2015, revenue from sales of titanium white was PLN 258,559 thousand and accounted for 10% of the Company’s total sales. The average selling prices were approximately 7% lower than in 2014. Sales of compound fertilizers (NPK, NP, NS and PK) are the most important source of revenue, accounting for 62% of the Company’s total sales. In 2015, revenue from sales of compound fertilizers came in at PLN 1,678,891 thousand, up by 29% year on year. In the compound fertilizer category, sales of NPK fertilizers are the main contributor to revenue, with a 46% share in total sales. In 2015, revenue from sales of compound fertilizers was up 32% year on year, reflecting an increase in sales volumes and market prices of NPK fertilizers in the reporting period. In 2015, revenue from sales of urea was PLN 368,216 thousand and accounted for 13% of the Company’s total sales.

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Figure 12. Revenue by product group 1 800 000 1 600 000 1 400 000 1 200 000

2015

1 000 000 2014 800 000

Compound 600 000 fertilizers Chemicals Urea

400 000 Titanium white 200 000 Other 0 Source: Company data. Revenue from sales of chemicals also grew – by 10% year on year. In the Other Activities group, accounting for 1% of total revenue, a year-on-year decrease was recorded in terms of sales value, on the back of lower sales of merchandise and materials. Figure 13.13 Revenue by product group 2015 Titanium white; Other Urea 10% 1% 13%

Chemicals 14% Compound fertilizers 62%

2014 Other 2% Compound Chemicals fertilizers 15% 55%

Urea 16%

Source: Company data. Compared with 2014, the share of urea in total revenue fell from 16% to 13%, while the share of titanium white was down from 12% to 10%. The share of compound fertilizers was up by 7pp. 5.3.3. Operating expenses Operating expenses were up 8% in 2015 relative to 2014. The most important item here was raw materials and consumables used. The main cause of the year-on-year increase in operating expenses was higher production. The growth in taxes and charges was attributable to higher waste storage

Grupa Azoty Zakłady Chemiczne Police S.A. Page 23 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) fees, driven by increased production of fertilizers. Salaries and wages are higher due to a pay agreement signed in Q1 2015. Table 12. Operating expenses Expenses Structure % Item 2015 2014 2015 2014 Amortisation 82,624 82,943 4 4 Raw materials and consumables used 1,739,190 1,605,469 71 71 Services 231,839 215,424 9 9 Salaries and wages, including overheads, and 237,859 219,876 10 10 other benefits Taxes and charges 96,313 92,749 4 4 Other expenses 54,937 44,291 2 2

In 2015, raw materials and consumables used at the Company were 8% higher year on year. The increase was mostly attributable to a higher production volume of compound fertilizers and related semi-finished products. Also, a significantly higher USD/PLN exchange rate resulted in higher prices of phosphorites used in the production of fertilizers, as well as prices of ilmenite and titanium slag − raw materials for the production of titanium white. The share of raw materials and consumables used in total operating expenses remained unchanged at 71%. In the reporting period, the Group posted a decrease in the cost of natural gas consumption (due to lower prices of gas). It should be noted that the key factor driving the Group’s expenses was the value and cost structure of raw materials/feedstock. In 2015, the Company’s other expenses were higher year on year, but their share in total operating expenses remained unchanged. Table 13. Other expenses [%] Item 2015 2014 Amortisation 12 13 Services 33 33 Salaries and wages, including overheads, and 34 33 other benefits Taxes and charges 13 14 Other expenses 8 7

5.3.4. Structure of assets, equity and liabilities Changes in assets disclosed in the statement of financial position in 2015: • Non-current assets increased by PLN 195,996 thousand (16%), due to investment expenditure in excess of depreciation/amortisation charges; • Current assets fell by PLN 58,696 thousand (-9%), • Inventories were down by PLN 71,367 thousand (18%), • Trade and other receivables decreased by PLN 19,213 thousand (8%); • Cash and cash equivalents stood at PLN 57,210 thousand as at December 31st 2015, having increased by PLN 25,125 thousand year on year.

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Table 14.14 Structure of assets Item 2015 2014 change % change Non-current assets, including: 1,387,715 1,191,719 195,996 16 Property, plant and equipment 1,055,862 906,769 149,093 16 Intangible assets 31,303 20,037 11,266 56 Investment property 24,713 24,428 285 1 Investments in subordinated entities 219,595 160,693 58,902 37 Current assets, including: 625,128 683,824 -58,696 -9 Inventories 327,046 398,413 -71,367 -18 Trade and other receivables 225,430 244,643 -19,213 -8 Cash and cash equivalents 57,210 32,085 25,125 78 Total assets 2,012,843 1,875,543 137,300 7

Significant changes in equity and liabilities in the period under review: • the Company’s equity increased due to the net profit generated in 2015, reduced by dividend distributed to the shareholders; • the carrying amount of current liabilities went down by PLN 123,179 thousand (19%), mostly due to reduced value of borrowings; • amounts drawn under current bank borrowings in 2015 were down, while amounts drawn under long-term investment facilities were up.

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Table 15. Structure of equity and liabilities Item 2015 2014 change % change Equity 1,166,878 1,040,784 126,094 12 Non-current liabilities, including: 328,502 194,117 134,385 69 Borrowings 208,313 84,669 123,644 146 Other non-current liabilities 175 247 -72 -29 Employee benefit obligations 53,903 51,260 2,643 5 Provisions 46,238 46,156 82 0 Current liabilities, including: 517,463 640,642 -123,179 -19 Trade and other payables 415,055 461,585 -46,530 -10 Borrowings 37,189 131,126 -93,937 -72 Provisions 53,710 39,894 13,816 35 Total liabilities 845,965 834,759 11,206 1 Total equity and liabilities 2,012,843 1,875,543 137,300 7

5.4. Financial ratios Profitability In 2015, the Company delivered strong performance. In 2015, the profitability ratios calculated by reference to revenue were higher than in 2014, mainly due to an improvement in the revenue-cost relationship resulting from higher margins generated on sale of products. Following the year-on-year improvement of financial performance, the Group posted higher profitability ratios calculated by reference to assets and equity. Table 16. Profitability ratios Ratio 2015 2014 Gross margin 17% 13% EBIT margin 8% 4% EBITDA margin 11% 8% Net margin 6% 3% ROA 8% 4% ROCE 14% 8% ROE 14% 8% Return on non-current assets 12% 7%

Ratio formulas: Gross margin = gross profit (loss) / revenue (statement of profit or loss and other comprehensive income) EBIT margin = EBIT / revenue EBITDA margin = EBITDA / revenue Net margin = net profit (loss) / revenue ROA (return on assets) = net profit (loss) / total assets Return on capital employed (ROCE) = EBIT / TALCL (total assets less current liabilities) Return on equity (ROE) = net profit (loss) / equity Return on non-current assets = net profit (loss) / non-current assets

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Liquidity In 2015, the current ratio exceeded its 2014 level. Current assets decreased, and so did current liabilities albeit at a slower rate. Relative to 2014, the quick ratio was higher, due to a decrease in liabilities. At the same time, there were positive changes in current assets, i.e. a decline in receivables (by 8% year on year) and inventories (by 18% year on year). Table 17. Liquidity ratios Ratio 2015 2014 Current ratio 1.2 1.1 Quick ratio 0.6 0.4 Cash ratio 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 In 2015, the Company’s cash conversion cycle shortened relative to the previous year, from 26 to 16 days. Relative to 2014, the inventory turnover period shortened by 18 days, while the average collection period shortened by 7 days. Concurrently, in 2015, receivables and inventories were down 8% and 18%, respectively, year on year. The average payment period shortened by 15 days on higher cost of sales (up by 9%) and a 19% decrease in payables. Table 18. Operating efficiency ratios Ratio 2015 2014 Inventory turnover period (days) 52 70 Average collection period (days) 30 37 Average payment period (days) 66 81 Cash conversion cycle 16 26

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 2015, the debt ratios were similar to those posted in 2014, The debt ratios were at levels guaranteeing financial security for the Company.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 27 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated)

Table 19. Debt ratios Ratio 2015 2014 Total debt ratio 42% 45% Long-term debt ratio 16% 10% Short-term debt ratio 26% 34% Equity-to-debt ratio 138% 125% Interest cover ratio 3,991% 1,337%

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 Interest cover ratio = (EBIT + interest expense) / interest expense 5.5. Explanation of differences between actual performance and financial forecasts for 2015 The Company did not publish any performance forecasts for 2015 on account of continued unpredictability in the product and feedstock markets on which the Company heavily depends. Developments on these markets have a material effect on the Company’s financial performance. Forecasting key economic indicators would, therefore, carry considerable risk, and their publication could lead to wrong investment decisions by potential investors. 5.6. Management of capital and assets In the reporting period, the Company’s financial performance was strongly correlated with the market environment. This correlation has been observed and recorded since the beginning of the Company’s operations in the free-market environment, and it remains beyond the Company’s direct control or influence. The Company is not subject to any external limitations relating to management of its financial resources and assets, other than standard requirements of the Commercial Companies Code. Generation of positive margins on the main products sold both on the domestic market and abroad remains the key factor determining the Company’s development, including growth of its financial resources and assets. The Company identifies and manages its liquidity risk, and also 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 business revenues, but the Company always maintains a safe level of credit reserve for use when necessary. In H1 2015, the Company adopted the “Liquidity Management and Financing Policy”, a material step in implementing a centralised financing model. The implementation of the policy principally serves to: • manage the financial position, • maintain current and long-term creditworthiness and ensure financial security, • ensure the financing for strategy implementation, • achieve and maintain the ability to service current and non-current liabilities, while optimising debt service costs and • ensure optimised allocation of cash surpluses. On April 23rd 2015, 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. signed the Intragroup Financing Agreement. Under the Agreement, the Company may obtain (from the Parent, Grupa Azoty S.A.) additional financing for its corporate needs.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 28 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated)

In the opinion of its strategic lenders, the Company has a sound liquidity position and enjoys a high credit standing. Given this, even with a potential economic slowdown, the risk that it might lose liquidity remains low. In 2015, there were no events of default, whether relating to timely payment of liabilities or other conditions, that could result in acceleration of debt. 5.7. Bank deposits The Company uses PLN-denominated overdraft facilities. Surplus cash is placed on PLN, USD and EUR overnight deposits under separate agreements. Table 20. Summary of the Parent’s bank deposits as at December 31st 2015

Bank Amount Opening date Maturity date Overnight deposits 40,318 Dec 31 2015 Jan 04 2016 Total bank deposits 40,318

5.8. Borrowing agreements concluded or terminated during the financial year Table 21.21 Material financing agreements signed or amended by an annex in 2015 and by the date of this Report Agreement Annex Currency date date Amount Maturity Intragroup financing Apr 23 2015 PLN NA Apr 22 2020 agreement

Annex to consolidated overdraft facility agreement Oct 01 2010 Apr 23 2015 PLN 123,000 Sep 30 2016 with PKO BP S.A.

Multi-purpose credit facility Apr 23 2015 PLN 82,000 Sep 30 2016 agreement with PKO BP S.A.

Annex to overdraft facility agreement with Bank Jun 26 2015 Nov 13 2013 PLN 80,000 Nov 12 2016 Gospodarstwa Krajowego Jul 30 2015 (BGK)

Loan from Grupa Azoty S.A. Sep 14 2015 PLN 104,000 Apr 23 2020 for investment projects*

Loan from Grupa Azoty S.A. for payment towards PDH Sep 14 2015 PLN 60,000 Dec 31 2024 Polska S.A. share capital* * Loans under the Intragroup financing agreement. All the PLN-denominated borrowings bear interest at 1M WIBOR plus a margin. Intragroup financing agreement On April 23rd 2015, an intragroup financing agreement was signed, making available the funds under the credit facility agreements concluded between Grupa Azoty S.A. and a syndicate of Polish banks (PKO BP S.A., BGK, BZWBK S.A. and ING BŚ S.A.) and the European Investment Bank and the European Bank of Reconstruction and Development. The total amount of available funds is PLN 2.2bn. These funds may be disbursed upon the instruction of Grupa Azoty S.A. and allocated depending on current financing needs.

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Annex 11 to the consolidated overdraft facility agreement with PKO BP S.A. On April 23rd 2015, an annex to the consolidated overdraft facility agreement with PKO BP S.A. was signed, providing for changes in collateral following the execution of the intragroup financing agreement. The sub-limit allocated to the Company is PLN 123m. Multi-purpose credit facility agreement with PKO BP S.A. On April 23rd 2015, a multi-purpose credit facility agreement with PKO BP S.A. was signed. Under the agreement, the then existing multi-purpose credit facilities available to the Grupa Azoty Group were consolidated and extended. The sub-limit allocated to the Company is PLN 82m. Credit limit agreement with Raiffeisen Bank Polska S.A. June 15th 2015 saw the expiry of the credit limit agreement concluded with Raiffeisen Bank Polska S.A. in October 2013. The agreement provided for total financing of up to PLN 120m, including an overdraft facility of PLN 80m. Investment credit facility agreement for the financing of the investment project ‘Exhaust gas treatment unit and upgrade of the EC II CHP plant at Grupa Azoty Zakłady Chemiczne Police S.A.’ On June 25th 2015, the PLN 50,000 thousand investment credit facility with PKO BP S.A. to finance the investment project ‘Flue gas treatment unit and upgrade of the EC II CHP plant at Grupa Azoty Zakłady Chemiczne Police S.A.’ concluded with PKO BP S.A. in June 2014 was terminated by mutual agreement. The termination followed the conclusion of the intragroup financing agreement providing for the financing of corporate needs, including investment projects. Annexes 2 and 3 to the overdraft facility agreement with Bank Gospodarstwa Krajowego June 26th 2015 saw the execution of an annex to the overdraft facility agreement with Bank Gospodarstwa Krajowego, providing for changes in collateral following the execution of the intragroup financing agreement. Another annex to the same agreement, dated July 30th 2015, was executed to amend the statement on voluntary submission to enforcement made under the agreement so as to ensure its consistency with the judgment issued by the Polish Constitutional Tribunal. Capital expenditure loan under the intragroup financing agreement On September 14th 2015, acting in accordance with the provisions of the intragroup financing agreement, Grupa Azoty S.A. advanced a PLN 104m loan for financing the Company’s capital expenditure planned until the end of 2015. Loan for paying up the share capital of PDH Polska S.A., granted under the intragroup financing agreement On September 14th 2015, acting in accordance with the provisions of the Intragroup financing agreement, Grupa Azoty S.A. advanced a PLN 60m loan for covering the share capital of the joint- stock company under the name of PDH Polska S.A., established for the purposes of executing the investment project ‘PDH propylene production unit with infrastructure’. Loan advanced by the Provincial Fund for Environmental Protection and Water Management (WFOŚiGW) of Szczecin for financing the investment project ‘Expansion of the post-calcination gas desulfurization system at facility 414 at the Titanium White Plant of Z.Ch. Police S.A.’ On October 15th 2015, the Company decided to terminate the PLN 6.2m loan from the Regional Fund for Environmental Protection and Water Management of Szczecin, in the amount of PLN 6.2m, granted to finance the project ‘Expansion of the post-calcination gas desulfurization system at facility No. 414 at the Titanium White Plant of Z.Ch. Police S.A.’ The loan’s interest rate was fixed. The loan was not disbursed. 5.9. Loans advanced Loans advanced to the Group’s related entities On December 31st 2014, the Company and Supra Agrochemia Sp. z o.o. executed a PLN 10m loan agreement. The loan is to be disbursed in tranches. By December 31st 2015, four tranches in a total amount of PLN 8m were disbursed.

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Loans advanced to non-Group entities On October 2nd 2015, the Company signed a PLN 1.5m loan agreement with Pogoń Szczecin S.A. The amount was disbursed on October 5th 2015 and repaid on October 22nd 2015. 5.10. Sureties and guarantees received and issued In 2014, acting as co-borrower under a credit facility agreement with BGŻ BNP Paribas Bank Polska S.A., the Company issued a surety to AFRIG S.A. On March 19th 2015, an annex to the credit facility agreement was signed, whereby the surety amount was increased from EUR 8,000 thousand to EUR 13,000 thousand. In connection with Grupa Azoty S.A.’s signing a revolving credit facility agreement with a bank syndicate, on April 23rd 2015 the Company issued a surety of PLN 600,000 thousand to Grupa Azoty S.A. On the same day, annexes were signed to the overdraft facility agreement and multi-purpose credit facility agreement with PKO BP S.A., whereby the Company issued sureties of PLN 120,800 thousand (overdraft facility agreement) and PLN 94,800 thousand (multi-purpose credit facility agreement) to Grupa Azoty S.A. On May 28th 2015, the Company issued to Grupa Azoty S.A. sureties of PLN 220,000 thousand and PLN 60,000 thousand, in connection with credit facility agreements signed with the European Investment Bank and the European Bank for Reconstruction and Development. Table 22. Guarantees issued and amended by annex in 2015 upon instruction from Grupa Azoty Group companies Type and parties Issue date Security for: Amount Validity date Bank guarantee PKO BP – PGE Agreement under Feb 04 2015 118 Mar 01 2016 S.A. an open tender Bank guarantee PKO BP – Customs debt Mar 25 2015 3,000 Mar 25 2016 Customs Chamber of Szczecin payment Electricity Bank guarantee PKO BP – PSE Nov 19 2015 transmission 800 Sep 30 2016 S.A. agreement Bank guarantee PKO BP – GAZ- Gas transmission Dec 17 2015 144 Nov 30 2016 SYSTEM S.A. agreement Bank guarantee PKO BP – GAZ- Gas transmission Dec 17 2015 9,350 Nov 30 2016 SYSTEM S.A. agreement

5.11. Material off-balance-sheet items Promissory notes As at December 31st 2015, there was effective only one blank promissory note at the Company, issued as collateral 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 Grupa Azoty Zakłady Chemiczne Police S.A. and guarantees issued by banks upon the Company’s instruction 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. 5.12. Financial instruments The Company manages financial risk in line with the ‘Financial (Currency and Interest Rate) Risk Management Policy’, approved by the Management Board under Resolution No. 428/VI/15 of February 2nd 2015. In 2015, given its operating environment, the Company did not use any financial instruments to hedge itself against currency or interest rate risk. In order to minimise currency risk, the Company relied on natural hedging, consisting in balancing income and expenses denominated in a given

Grupa Azoty Zakłady Chemiczne Police S.A. Page 31 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) currency to reduce the effect exchange rate fluctuations on financial performance to the minimum. Financial instruments and related risks, as well as financial risk management methods and objectives adopted by the Company, were comprehensively described in the financial statements for 2015 (note 26). 5.13. Forecast financial position The Company did not identify any threats that could materially change its economic and financial position in 2016.

6. Risks, threats and growth prospects 6.1. Significant risk factors and threats 6.1.1. Strategic management Risk associated with strategic project planning and implementation processes The “Grupa Azoty Group Strategy for 2014–2020 – Operationalisation” defines three strategic areas of decisive importance to value growth, including organic growth achieved through investment projects. The Company will focus on developing new products and enhancing the efficiency of existing units. It is also planning to secure new sources of raw materials and reduce production costs of key products. Moreover, in the coming years a number of upgrades are planned with respect to the existing units with a view to bringing them in compliance with applicable legal requirements, such as the IED Directive. The planning and execution of strategic projects entails multiple risks. The primary risk is associated with failure to complete investment projects according to initial plans and failure to achieve desired results. The preparation phase of investment projects involves the risk of failure to 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 duly prepared or unexpected circumstances arise, the Company also risks incurring additional capital expenditure during execution. The success of strategic projects is contingent on many external and internal factors. Main external factors affecting the Company’s growth opportunities and growth rate include: macroeconomic factors, market situation, economic environment, xxx operations of main competitors. The adverse impact of these factors, which are largely beyond the Company’s control, may impede the achievement of planned growth ambitions and strategic goals. Major internal factors and efforts important to the Company’s growth include the technical condition of production units and organisational preparedness to follow the investment programme. To mitigate the risk accompanying strategic projects, the Company has introduced internal procedures defining and governing the process of preparing and executing investment projects. The planning phase is based on reliable market information sourced from e.g. reports of external companies specialising in market research or opinions of technology, economy and market advisors. Oversight has been introduced over strategic projects, which involves a review of the key assumptions of the given project (business effects, budgets, KPIs, schedules, division of responsibilities). Additionally, regular updates about project status are provided and each deviation from initial assumptions requires the Project Manager’s written justification. 6.1.2. Technical and environmental safety Risk of major industrial accidents or technical failures resulting in disruption of operations and stoppage of key production units The Company conducts operations that involve handling large quantities of hazardous chemical substances. The Company’s priority is to observe the most stringent safety standards to minimise the risk of industrial accidents. The measures and programmes implemented by the Company ensure appropriate conditions for the manufacture, storage, transport and distribution of substances to meet the environmental protection requirements. The Company is classified as a plant with a high risk of a major industrial

Grupa Azoty Zakłady Chemiczne Police S.A. Page 32 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) accident. The Company has developed and introduced mandatory programmes to prevent failures, and regularly monitors and implements legal requirements relating to safety, including the requirements of the Seveso III Directive transposed into Polish legislation. Grupa Azoty Zakłady Chemiczne Police S.A. has in place technical and organisational measures to prevent failures and mitigate their consequences. 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 care for safety is evidenced by the certificates it holds. 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 third-party institutions − for instance, the Company once again received the Gold Card Leader on Safety at Work Award (2015-2016). The Company’s units are equipped with a range of process interlocks and interlocks supervised by the Technical Inspection Office that prevent failures and ensure operational and equipment safety in the event of disruption of operations. TPL (Total Preventive Maintenance) programmes and modern Preventive Maintenance programmes implemented across all organisational units of the Company, supported by the CMMS system and planned plant maintenance management will significantly enhance the technical condition and reliability of units, thereby minimising the risk of failures.

Risk of failure to meet deadlines for reduction of NOX, SO2 and particulate matter emissions The Regulation of Minister of the Environment of November 4th 2014 on emission standards for certain units, fuel combustion sources, as well as waste incineration and co-incineration equipment will introduce, as of January 1st 2016, new, more restrictive emissions standards for fuel combustion installations. The new standards apply to sulfur dioxide, nitric oxides and particulate matter emission limits. The Industrial Emissions Directive and Environmental Protection Law provide for mechanisms postponing the effective date of the more restrictive emissions standards. One such mechanism is the Transitional National Plan (TNP). The fuel combustion sources including the EC II CHP plant have been submitted for inclusion in the TNP. According to the TNP derogatory mechanism, for combustion sources of the EC II CHP plant, from January 1st 2016 to June 30th 2020 the emission limits “will be calculated for each year as a moving average”. In order to avoid exceeding the emission limits set out in the TNP, the EC II CHP plant will require timely completion of investments aimed at reducing its output of NOx, SO2 and particulate matter. As of January 1st 2016, lower emission standards for particulate matter will also apply to the units of the EC I CHP plant. Risk associated with permitted levels of GHG and other pollutant emissions, and management of emission limits as required by EU Directives During the Company’s technological processes, pollutants and greenhouse gases (GHG) are emitted into the air. The Company regularly monitors changes in legal regulations concerning emissions of greenhouse gases. This risk is related to further limitation of free allocations of GHG emission allowances leading to increased costs of purchasing additional allowances. Changes (risk of major increase) in allowance prices may affect the Company’s financial performance. The Group has in place a monitoring system for emissions covered by the EU ETS. It also performs ongoing balancing of greenhouse gas emissions. The Company monitors on an ongoing basis its actual emissions and the market prices of emission allowances and takes appropriate steps in response to their fluctuations. Risk associated with new legal requirements relating to production processes The Company manages this risk through ongoing monitoring of current legislation and acts according to changes in legal regulations. The Company actively participates in social consultations of proposed legal acts. New provisions of the environmental protection law, transposing the IED Directive, introduced new requirements applicable to the titanium white manufacturing unit. As of January 2015, new emissions standards and requirements for air pollution emissions monitoring apply. Maintaining the work of air protection systems (mainly a desulfurization unit and dust

Grupa Azoty Zakłady Chemiczne Police S.A. Page 33 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) extraction equipment) and continuous monitoring system are necessary to meet these requirements. xxx As required under the IED Directive, the Company has prepared the “Baseline Report for Grupa Azoty Zakłady Chemiczne Police S.A.”. The document presents information necessary to determine soil and groundwater contamination levels. The Company has conducted soil and groundwater contamination tests (boreholes, sampling, analyses) in critical locations across the plant. The report was submitted to and accepted by the Marshal Office of the Province of Szczecin. On December 1st 2015, public consultations were announced concerning draft regulations of the Minister of the Environment on the procedure of assessing soil contamination and on the register of historical soil contaminations. Pursuant to the requirements stipulated in the drafts, the Company may have to perform additional, costly soil tests. In July 2015, a new Act on ozone-depleting substances and fluorinated greenhouse gases entered into force. The provisions of the Act impose on users of equipment containing fluorinated gases new, far-reaching obligations as well as new licensing requirements. December 2015 saw the adoption of draft BAT conclusions for the Common Waste Water and Waste Gas Treatment/Management Systems in the Chemical Sector (CWW). The provisions of the CWW conclusions may necessitate modifying the provisions of the integrated permit as regards the parameters of pollutants and their monitoring. The risk related to BAT conclusions, which have not yet been defined for the Company’s installations, remains unchanged. The period for adapting production units to the emission levels specified in BAT conclusions is four years. Additionally, to comply with BAT requirements, the Company monitors on an ongoing basis drafts of new laws and regulations and actively presents its opinions on the proposed legislation. 6.1.3. Comprehensive customer support Risk of higher fertilizers imports (Europe, China, Russia, Africa, America) There is a likelihood of deterioration in the competitive position of the Company’s fertilizers segment, which is mainly determined by the cost of natural gas as well as potassium and phosphoric feedstocks, which are the main cost items in manufacturing NPK fertilizers. In this respect, European manufacturers are disadvantaged relative to fertilizer producers operating in other parts of the world, for instance in the Middle East, the US (shale gas), Russia (dual pricing of natural gas, internal potassium and apatite resources) or Asia (chemical manufacturers integrated with raw material suppliers). In order to strengthen the Company’s position in the production and sales segment, the Company has been taking steps to diversify the supply of gas and phosphorus-bearing materials. Risk of deteriorated supply-demand balance The Company operates in a demanding and changeable competitive environment, frequently facing an unfavourable demand-supply relationship, and prices of the fertilizers it manufactures strongly depend on the levels of local and international supply and demand. The market of titanium white is governed by the same 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 are increasing 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: • There is a risk that the safeguards protecting the EU market against imports of products from regions which apply a dual pricing policy might be loosened. The dual pricing policy pursued by some countries poses a threat to the Company’s business and its ability to sell its products. Dual pricing of natural gas is a case in point; • Capacity expansion plans of the Company’s major competitors in 2015-2020. Key risks related to titanium white include: • Weaker 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, • Significant increase in the production capacities of Chinese manufacturers.

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There is a potential risk of exacerbating the unfavourable trend of titanium white manufacturers and importers from outside Europe increasing their activity. The main supply sources are China and Ukraine. To maintain its current market position, the Company has adopted a restructuring plan to boost sales on the domestic and export markets by trying to reach new, smaller customers. These efforts help to keep the margins relatively flat. Measures taken by the Company to strengthen its competitive advantages on the fertilizer market include investment projects designed to improve the efficiency and flexibility of production processes. At the same time, the Company is diversifying its sales markets and customer base. Risk of deteriorated performance caused by weaker macroeconomic environment The increasing supply of fertilizers produced with cheap gas and the growing manufacturing capacities in the sector have led to intensified competition in the nitrogen and NPK fertilizer markets. In order to strengthen and consolidate its leadership in the production and sales segment, the Company is taking steps to optimise the production costs and broaden its portfolio of products and services. Measures taken by the Company to strengthen its competitive edge include implementation of the Company’s updated strategy, investment projects designed to improve the production efficiency, increased use of phosphate rock from its own sources, taking active part in the process of chemical industry consolidation, taking anti-dumping measures, active participation in the work of Fertilizers Europe, cooperation with universities and research institutes. Risk related to customers’ growing quality and environmental requirements for the Company’s products At the end of 2015, the European Commission decided to continue imposing restrictions on the content of cadmium in phosphate fertilizers. The Grupa Azoty Group actively participates in the process, providing specialist support to Fertilizers Europe, a fertilizer industry organisation, to help it convince the Commission that there are no scientific grounds for imposing tight restrictions on cadmium content in fertilizers. 6.1.4. Availability of feedstocks and materials Risk related to maintaining ammonia production continuity The way in which the ammonia unit operates requires production continuity. This entails a number of risks. Key risks that may affect the continuity of ammonia production should be divided into internal and external factors. The external factors affecting production continuity, which are beyond the Company’s control, include oversupply on the ammonia market, falling prices on the local and international markets, economic environment, political factors governing the availability of transmission pipelines and, as a result, disruptions in the supply of natural gas, which is the Company’s basic resource, as well as the demand mechanism, considerably dependent on the economic environment. Precisely selected tools and assumed objectives, such as diversification of feedstock supplies, market research and analyses and flexible management of customer base, serve to minimise the risks. The internal factors include technological constraints, such as the type and structure of equipment, complexity, nature of emergency repair works, availability of the specialist maintenance team and spare parts. The Company has undertaken a number of initiatives to ensure reliable operation of the unit and maximum availability of machinery and equipment, including: • Implementation of the TPL programme and Preventive Maintenance programmes, supported by the CMMS system, and planned management of plant maintenance, which will significantly enhance the technical condition and reliability of units, thereby minimising the risk of failures; • Upgrade of the ammonia unit, mainly to reduce energy-intensity that will bring savings in key feedstocks and utilities (natural gas, steam heat, electricity); • optimisation of the ammonia production process, manifested in effective management of the stream of production with appropriate selection of operating parameters for machinery and

Grupa Azoty Zakłady Chemiczne Police S.A. Page 35 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated)

equipment, which results in maximum capacity utilisation and achievement of expected production volumes. 6.2. External and internal factors material to the Company’s growth 6.2.1. External factors Market factors The strongest drivers of the Company’s situation are those relating to the purchase of raw materials/feedstock as they have the greatest effect on production costs. The relationship of product market prices to key feedstock prices has a marked effect on the competitiveness of the Company’s product offering. On the expenses side, the price of natural gas and phosphate rock is a material factor. In 2016, the Company plans to further increase the supply of phosphate rock from its mine in Senegal, which is expected to bring down production costs. An external material driver of the demand for fertilizers is the macroeconomic situation in the agricultural sector. High global grain stocks and high yields forecast for the next harvest result in grain prices on global markets remaining low. In Poland (as well as in Germany and Denmark), the financial situation of farmers did not improve in 2015 as a growing number of farmers experienced liquidity constraints. Unusual winter in Poland (part of plantations have already frozen) may bring about lower yields in 2016 and drive up the prices of agricultural products. Global fertilizer markets are highly affected by unstable conditions on financial markets. Troubled by financial difficulties and currency devaluation, such countries as India, Turkey and a number of countries in Asia and South America, continue the policy of limited fertilizer purchases. Large fertilizer production surpluses in China and the launch of new fertilizer production units in the US, Morocco and Persian Gulf result in a growing competition on global fertilizer markets. The Company’s fertilizers are sold mainly on the Polish market, which still holds strong growth potential following from the drive to reach the rate of fertilizer application recorded in Western Europe. The 2015 deceleration of global economic growth, and in particular the slowdown in Chinese economy, weakened the demand for titanium white. The excess of production capacities intensified competition for sales markets and led to a significant correction of the product price. The capacity shutdowns (permanent) in Europe and the US, as well as the planned shutdowns of production units in China in 2016, should reduce the supply and enhance the supply-demand balance. 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 Grupa Azoty Zakłady Chemiczne Police S.A. Legislative changes will affect the Company’s business in two ways. On the one hand, the need for compliance will determine the changes and solutions implemented by the Company. On the other hand, legal regulations binding on the Company’s customers and users of its products will affect demand. 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). Currently, work is under way to enact a new EU fertilizer regulation applicable in all EU member states. The new legislation would impose more stringent limits for cadmium content in phosphate and compound fertilizers and introduce regulations governing the new category of mineral-organic fertilizers. The proposed amendments to the REACH Regulation, governing registration of chemicals, are designed to prevent the use of boron compounds in fertilizers, as the substances are considered harmful to health. All the legislative changes currently underway will in the coming years have a major impact on the Company’s environment and its operation in the market reality. 6.2.2. External factors Liquidity and debt Generation of positive margins on the main products sold both on the domestic and international markets remains the key factor in the Company’s current and ongoing liquidity in the long-term. The Company conducts an active cash flow (payables and receivables) management policy by using

Grupa Azoty Zakłady Chemiczne Police S.A. Page 36 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) trade credit and advance payment in the settlement of sale transactions, extending payment deadlines in purchase transactions, and insuring its receivables under sale transactions. The Company manages its liquidity by maintaining credit facilities appropriate for the scale of its business, which constitute a liquidity reserve minimising the effects of delayed payment of liabilities. Sales intensification Apart from the achievement of market-related objectives, another important function of sales policy is to maximise the Company’s sale volumes through full optimisation of production capacity. Given its production scale and flexibility, the Company can keep expenses down to a minimum and thus offer competitive pricing when compared to other manufacturers having direct access to most raw materials. Sales intensification measures focus primarily on maximising sales volumes in the most profitable markets worldwide. By adapting trade 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 sales volume growth 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 guarantees 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. It encompasses over ten different types of fertilizers with different chemical compositions and application properties. POLIFOSKA® brand has become a synonym of compound fertilizers in Poland. The POLIFOSKA brand has a high concentration of pure constituents, chemical uniformity of fertilizer grains, high assimilability of constituents, optimal granulation and application characteristics, as well as favourable price of pure constituents; • Apart from POLIFOSKA® products, the Company also offers a diammonium phosphate (NP 18-46) fertilizer sold under the brand name of POLIDAP® and a low-chloride compound fertilizer under the brand name of POLIMAG® S; • TYTANPOL® − 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 have high quality, opacifying and brightening qualities, are stable, easily dispersible, intercompatible and non-toxic.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 37 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated)

7. Company shares 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 related entities Number and par value of Grupa Azoty Zakłady Chemiczne Police S.A. 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 23. Company shares held by management personnel Number of shares / voting rights As at As at As at

Jan 01 2015 Dec 31 2015 this Report date Jałosiński Krzysztof 1,000 1,000 1,000 Kuźmiczonek Rafał - - - Naruć Wojciech - - - Podolak Anna - - -

Table 24. Parent shares held by supervisory personnel Number of shares / voting rights As at As at As at Jan 01 2015 Dec 31 2015 this Report date Paweł Jarczewski* - - - Marcin Likierski**** - - - Maciej Lipiec** - - - Wiesław Markwas 500 500 500 Andrzej Skolmowski - - - Anna Tarocińska 1 1 1 Wojciech Wardacki***** - - - Patrycja Zielińska*** - - - * Until February 19th 2016. On February 19th 2016, the Company received a notification on resignation of Mr Paweł Jarczewski from the position of Chairman of the Supervisory Board. The Company disclosed this information in Current Report No. 7/2016. ** Until May 26th 2015. On May 5th 2015 the Company received the resignation of Mr Maciej Lipiec as Member of the Company’s Supervisory Board with effect from May 26th 2015. The Company reported on the resignation in Current Report No. 13/2015. *** Since May 27th 2015. On May 27th 2015, the Company’s General Meeting appointed Ms Patrycja Zielińska as a new member of the Company’s Supervisory Board, to serve during the 6th joint term of office. The Company reported on the appointment in Current Report No. 17/2015. **** Until March 1st 2016. On March 1st, the Company received a letter from the Minister of the State Treasury removing Mr Marcin Likierski from the Supervisory Board (effective from March 1st 2016). The Company disclosed this information in Current Report No. 10/2016. *****Since March 1st 2016. On March 1st, the Company received a letter from the Minister of the State Treasury appointing Mr Wojciech Wardacki to the Supervisory Board (effective from March 1st 2016). The Company disclosed this information in Current Report No. 10/2016.

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7.2. Agreements known to the Company which may cause future changes in share percentages of existing shareholders and bondholders As at the date of approval of this Report, the Company was not aware of any agreements between shareholders or any agreements that may lead to future changes in the percentages of shares held by existing shareholders and bondholders. 7.3. Control systems for employee share ownership plans The Company has no control system for employee share ownership plans in place. 7.4. Treasury shares held by the Company and persons acting on its behalf The Company holds no treasury shares. 7.5. Issue, redemption, and repayment of debt and equity securities In 2015, the Company did not issue, redeem or repay any debt or equity securities. 7.6. Use of proceeds from share issues As described in Section 7.5., in 2015 the Company did not have any share issue proceeds. 7.7. Company shares The Company shares were listed on the Warsaw Stock Exchange for the first time on July 14th 2005. Company 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. Grupa Azoty Zakłady Chemiczne Police S.A. share performance At the beginning of 2015, the price of Company stock was PLN 18.35 and then entered a moderate upward trend throughout Q1 2015, to PLN 24.05. Initially in Q2 2015, the price was PLN 24.07 per share, to gradually go down over time. In Q3 2015, the price went up to PLN 23.99. The trend continued into the fourth quarter and on November 30th the price reached its 2015 peak of PLN 29.10. The Company stock ended 2015 with the price of PLN 27.50, an increase of almost 50% over the year. Figure 14. Grupa Azoty Zakłady Chemiczne Police S.A. share performance in 2015 35,00

30,00

25,00

20,00

15,00

10,00

5,00

0,00 01 2015 02 2015 03 2015 04 2015 05 2015 06 2015 07 2015 08 2015 09 2015 10 2015 11 2015 12 2015 Source: Company data. Dividend policy In line with the Strategy of the Grupa Azoty Group for 2013–2020, the guiding principle behind the dividend policy is to make payments proportionate to the Company’s earnings and financial standing. The General Meeting is recommended to resolve on dividend payments representing 40% to 60% of the Company’s separate net profit for a given financial year. Decisions on dividend payments are made with consideration given to a range of factors concerning the Company, and this

Grupa Azoty Zakłady Chemiczne Police S.A. Page 39 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) includes prospects for its further operations and earnings, cash requirement, financial position, expansion plans and related legal requirements.

Recommendations Table 25.25 Recommendations concerning the Company shares, issued between January 1st 2015 and the date of this report Price on Recommend Target price recommend Institution Date ation (PLN) ation date (PLN) Feb 09 2015 Hold 19.5 20.2 DM BOŚ Feb 12 2015 Sell 16.6 20.8 ING Securities S.A. Mar 03 2015 Sell 14.9 22.0 DM BZ WBK Pekao Investment Banking Apr 16 2015 Sell 17.9 23.8 S.A. May 08 2015 Sell 16.3 22.9 DM BZ WBK Jul 22 2015 Buy 24.7 21.7 DM BOŚ Aug 06 2015 Buy 24.9 23.6 ING Securities S.A. Nov 06 2015 Hold 23.0 24.2 DM BDA S.A. Nov 19 2015 Buy 29.0 24.4 DM BOŚ Dec 18 2015 Buy 30.4 27.3 ING Securities S.A.

Stock performance Table 26. Share price performance Since IPO 2014 2015

Historical high 30.00 25.00 29.10 Historical low 4.20 16.50 17.40 Average price 13.56 21.37 23.02 Average trading volume 85,092 6,656 3,738

Investor relations Acting in accordance with the highest standards of capital market communication and corporate governance, the Company provides 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 Company’s current and periodic reports, important information about AGMs and EGMs, analyst recommendations and financial results.

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8. Statement of compliance with corporate governance principles Pursuant to Par. 29.5 of the Rules of the Warsaw Stock Exchange, acting under Resolution No. 1013/2007 of the Warsaw Stock Exchange Management Board, the Company’s Management Board hereby submits the 2015 report on the Company’s compliance with the corporate governance principles included in the Code of Best Practice for WSE Listed Companies. 8.1. Corporate governance code applicable to the Company and availability of the text of the code to the public Observing the highest standards of communication on the capital market and corporate governance principles, in 2015 the Company complied with the Code of Best Practice for WSE Listed Companies issued by the Warsaw Stock Exchange. The Code effective in 2015 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 Code of 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 7 and the Company’s websites. 8.2. Degree of the Company’s non-compliance with the corporate governance rules, specification of the rules not complied with, and reasons for the non- compliance Since the first listing of its shares in 2008, the Company has always sought to comply with corporate governance principles. In line with the Code of Best Practice for WSE Listed Companies effective in 2015, the Company’s Management Board stated that the Company will comply with all but the following recommendations: • Principle 9a in part II of the Document: “A company should operate a corporate website and publish on it, in addition to information required by legal regulations (…): 9 a) a record of the General Meeting in audio or video format.” Explanation: 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. The Company does not rule out complying with this principle in the future. • Principle 10 in part IV of the Document: “A company should enable its shareholders to participate in a General Meeting using electronic communication means through: o real-life broadcast of General Meetings, o real-time bilateral communication where shareholders may take the floor during a General Meeting from a location other than the General Meeting.” Explanation: The Company’s Articles of Association do not provide for shareholders’ participation in a General Meeting using electronic communication means. The large number of shareholders renders it difficult to guarantee simultaneous, equal and problem-free participation of all shareholders. Given the wide shareholder base, difficulties may also arise in terms of information security. However, the Company does not rule out complying with this principle in the future.8 Moreover, in Current Report No. 55/2008 of December 30th 2008, the Company announced that it does not comply with Principle 2 in part II of the Code of Best Practice for WSE Listed Companies. Under that principle, as of January 1st 2009, the Company should have ensured that its website is available in the English language at least to the extent described in Section II.1 of the Code. The Company’s website is available in English, but not to the extent prescribed in the abovementioned principle due to organisational constraints. The Company’s objective is to create an organisational environment that would enable full implementation of the principle.

7 http://static.gpw.pl/pub/files/PDF/RG/DPSN2016__GPW.pdf 8 The Company announced this in Current Report No. 2/2013 released on April 26th 2013 via the EBI system operating under the Code of Best Practice for WSE Listed Companies.

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Following the issue of the new Code of Best Practice for WSE Listed Companies 2016, the Management Board stated that as of January 1st 2016 the Company applies all but the following of the Code’s recommendations and detailed principles: • Recommendation 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. 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 does not rule out complying with 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. • and principles: o I.Z.1.20 “A company should operate a corporate website and publish on it, in addition to information required by legal regulations, a record of the General Meeting in audio or video format.” Explanation: 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. The Company does not rule out complying with this principle in the future. The Management Board believes that non-compliance with this principle 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.

o II.Z.3. At least two supervisory board members should meet the independence criteria set out in Principle II.Z.4. Explanation: The Management Board believes that non-compliance with this principle does not adversely affect the performance of duties by the Supervisory Board since in appointing Supervisory Board members the General Meeting is guided by the criteria of appropriate education, professional experience, as well as high intellectual and moral profile. The Management Board is of the opinion that these criteria ensure proper performance of duties by the Supervisory Board. Since decisions in this respect are adopted by the Company’s corporate bodies independent of the Management Board, the Management Board is unable to determine whether the non- compliance is of permanent nature. The Company does not rule out complying with this principle in the future. The Management Board will recommend that the Company’s relevant bodies take steps to remove the non-compliance.

o II.Z.7. Annex I to the Commission Recommendation referred to in principle II.Z.4 applies to the tasks and the operation of the committees of the Supervisory Board. Where the functions of the audit committee are performed by the supervisory board, the foregoing should apply accordingly. Explanation: None of the Audit Committee members, including the Chairperson, meets the independence criteria laid down in principle II.Z.4. However, the Company and the Supervisory

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Board believe that the Audit Committee’s composition and the Chairperson’s documented qualifications, knowledge and experience in accounting and finance guarantee proper performance of the duties imposed on the Audit Committee by the Supervisory Board and proper supervision of the Company. Since decisions in this respect are adopted by the Company’s corporate bodies independent of the Management Board, the Management Board is unable to determine whether the non- compliance is of permanent nature. The Company does not rule out complying with this principle in the future. The Management Board will recommend that the Company’s relevant bodies take steps to remove the non-compliance.

o II.Z.8. The chair of the audit committee should meet the independence criteria referred to in principle II.Z.4. Explanation: Pursuant to Annex I to the Commission Recommendation referred to herein, at least a majority of the Audit Committee members should be independent. As at the issue date of this report, the Audit Committee’s composition was as follows9: Andrzej Skolmowski − Chairman of the Audit Committee, Anna Tarocińska − Secretary of the Audit Committee. None of the Audit Committee members, including the Chairperson, meets the independence criteria laid down in principle II.Z.4. However, the Company and the Supervisory Board believe that the Audit Committee’s composition and the Chairperson’s documented qualifications, knowledge and experience in accounting and finance guarantee proper performance of the duties imposed on the Audit Committee by the Supervisory Board and proper supervision of the Company. Since decisions in this respect are adopted by the Company’s corporate bodies independent of the Management Board, the Management Board is unable to determine whether the non- compliance is of permanent nature. The Company does not rule out complying with this principle in the future. The Management Board will recommend that the Company’s relevant bodies take steps to remove the non-compliance.

o IV.Z.2. “If justified by the structure of shareholders, companies 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 does not rule out complying with this principle in the future. The Management Board believes that non-compliance with this principle 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. 8.3. Internal control and risk management systems In November 2009, the Supervisory Board established an Audit Committee in order to improve the productivity of the Board’s work and to strengthen control over the Company. The Audit Committee is an advisory body acting collectively within the Supervisory Board. 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 Grupa Azoty Zakłady Chemiczne Police S.A. is an element in the process of the development and protection of the Company’s value. In 2015, the risk management function identified risks in each area of the Company’s operations. As numerous risks are interrelated, their

9 On February 19th 2016, the Company received a notification on resignation of Mr Paweł Jarczewski from the position of Chairman of the Supervisory Board. The Company disclosed this information in Current Report No. 7/2016.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 43 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) effect on one another is examined and steps are taken to mitigate the risks to the minimum. Improvements were also made in the use of risk management tools, including methods of risk identification, assessment and monitoring. Owners have been assigned for each risk. Risk owners are responsible for defining the approach to identified risks assigned to them, for coordination and supervision of those risks, as well as for the performance of risk monitoring and reporting tasks. Risk Owners supervise the identified risks, while the Management Board members responsible for individual processes and the Audit Committee perform the control function. The Internal Audit Division performs control tasks relating to risk management. Solutions enabling the management and supervisory bodies to fully monitor the risk management process are in place. Consequently, the steps taken form an element of a systematic approach to risk management. Thus, a systematic approach is applied in performing the tasks undertaken to review and ensure the correctness and effectiveness of measures taken to manage individual 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 organisational units, 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. 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. Shareholding structure Table 27. Shareholding structure as at the date of this Report Ownership % of total Shares Voting rights Shareholder interest (%) vote Grupa Azoty S.A. 49,500,000 66.00% 49,500,000 66.00%

OFE PZU Złota Jesień 11,650,000 15.53% 11,650,000 15.53% 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 3,482,678 4.64% 3,482,678 4.64%

75,000,000 100% 75,000,000 100%

Grupa Azoty Zakłady Chemiczne Police S.A. Page 44 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated)

Table 28. Shareholding structure as at December 31st 2015 Ownership % of total Shares Voting rights Shareholder interest (%) vote Grupa Azoty S.A. 49,500,000 66.00% 49,500,000 66.00% OFE PZU Złota Jesień 11,257,189 15.01% 11,257,189 15.01% 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 3,875,489 5.17% 3,875,489 5.17% 75,000,000 100% 75,000,000 100%

Table 29. Shareholding structure as at December 31st 2014 Ownership % of total Shareholder Shares Voting rights interest (%) vote Grupa Azoty S.A. 49,500,000 66.00% 49,500,000 66.00% OFE PZU Złota Jesień 10,400,000 13.87% 10,400,000 13.87% 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 4,732,678 6.31% 4,732,678 6.31% 75,000,000 100% 75,000,000 100%

On January 30th 2015, Grupa Azoty Zakłady Chemiczne Police S.A. was notified that OFE PZU Złota Jesień had acquired 857,189 shares in the Company, which increased its holding to 15.01% of the Company’s share capital. According to the list of persons entitled to participate in the Extraordinary General Meeting called for February 16th 2016, provided to the Company by the CSDP, OFE PZU Złota Jesień registered 11,650,000 shares, which is equivalent to an increase of its interest in the Company’s share capital to 15.53%. 8.5. Special control powers of security holders All the Company shares carry the same rights. The State Treasury’s right to call General Meetings and to appoint and remove a Supervisory Board member are discussed in Sections 8.8 and 8.10 of this Report. 8.6. 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. 8.7. 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.

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8.8. Rules governing appointment and removal from office of management personnel; powers of such personnel, including their authority to decide on the issue or buy-back of 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 members of the Management Board is specified by the body appointing the Management Board. The Management Board’s term of office is 3 (three) years. 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. 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 Management Board’s operating rules and the division of responsibilities for the conduct of the Company’s affairs among its Members are provided in the Rules of Procedure for the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. In accordance with the Rules of Procedure and the division of roles between the Management Board Members, the powers and responsibilities for the supervision of individual organisational areas within the Company are determined by the Management Board by way of a resolution. 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 State Treasury, represented by the competent minister, has the right to appoint and remove from office one member of the Supervisory Board, • as of the date when the State Treasury ceased to be the Company’s sole shareholder, the Company employees retain the right to elect candidates to the Supervisory Board in the following proportions: o two persons − if the Supervisory Board consists of up to six members, o three persons − if the Supervisory Board consists of seven to nine members. The election is a direct election held by secret ballot and open to all employees, and is conducted by the Central Election Committee appointed by the Supervisory Board from among the Company’s employees. A Management Board candidate cannot serve on the Election Committee. 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. Members of the Supervisory Board are appointed for a joint three-year term of office. Supervisory Board Members may tender their resignations in writing to the Management Board. The Supervisory Board performs its duties in compliance with the Rules of Procedure for the Supervisory Board, which detail its operating procedures.

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8.9. Rules governing amendments to the Company’s Articles of Association Resolutions to amend the Articles of Association are passed following a three-fourths majority vote at the General Meeting. 8.10. Operation of the General Meeting The General Meeting operates in accordance with the Articles of Association and the Rules of Procedure of the General Meeting, which indicate in particular the rules governing operation of the General Meeting, the holding of meetings, adoption of resolutions and the holding of elections, including block vote elections to the Supervisory Board. The General Meeting adopts the Rules by way of a resolution. The General Meeting strives to ensure the stability of the Rules. Convention of and agenda of the Meeting 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. 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 the Polish Accountancy Act. The General Meeting may only pass resolutions concerning matters on its detailed 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. A resolution not to consider an item placed on the agenda may be passed only for valid reason. A proposal to pass such resolution requires a detailed statement of reasons. A decision to remove an item from the agenda or not to consider an item placed on the agenda upon shareholder request is sanctioned by a resolution passed by the General Meeting, which must be approved by all requesting shareholders present at the General Meeting and carried by at least 75% of the votes cast. 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/

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A General Meeting may be attended by members of the media. Adoption of resolutions The wording of a resolution put to vote should be such as to enable any eligible person who disagrees with how a given matter is resolved to challenge the resolution. The person raising an objection has the right to provide concise grounds for the objection. The General Meeting has the capacity to adopt resolutions irrespective of the number of shares represented at the Meeting. Resolutions are passed by an absolute majority of votes cast unless the Commercial Companies Code, the Articles of Association or the Rules of Procedure stipulate otherwise. 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: • appointment and removal of the Supervisory Board members appointed by the General Meeting, including the Chairperson of the Supervisory Board, subject to the provisions of Art. 32.1 and Art. 34 of the Articles of Association, • 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 purchase of real estate, right of perpetual usufruct, interest in real estate or right of perpetual usufruct with a market value exceeding PLN 10,000,000 (ten million złoty), • approval of disposition, including sale and encumbrance with limited property rights, of real estate, right of perpetual usufruct, interest in real estate or right of perpetual usufruct with a market value exceeding PLN 2,000,000 (two million złoty), • 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. 30.1.8 and Art. 30.1.19, • approval of the Election Rules referred to in Art. 34 of the Articles of Association, as adopted by the Supervisory Board, defining the procedure for appointment of the Supervisory Board members elected from among candidates nominated by the employees, and • adoption of the rules of procedure for the General Meeting, defining in detail how the Meeting is to be held and pass its resolutions.

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8.11. Composition, changes and operation of the Company’s management and supervisory bodies Management Board During the reporting period, there was no change in the composition of the Management Board, which as at the date of this report was as follows: • Krzysztof Jałosiński - President of the Management Board, • Rafał Kuźmiczonek - Vice-President of the Management Board (representing Company employees), • Wojciech Naruć - Vice-President of the Management Board, • Anna Podolak - Vice-President of the Management Board. Powers and responsibilities of the Management Board members 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 issue of this report, the division of powers and responsibilities of the Management Board members is governed by: • Management Board Resolution No. 527/VI/15 of June 26th 2015 concerning the division of powers and responsibilities among the Management Board members with regard to the supervision 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. 526/VI/15 of June 26th 2015), approved by the Supervisory Board in Resolution No. 160/VI/15 of July 7th 2015. Pursuant to Management Board Resolution No. 527/VI/15 of June 26th 2015, the supervisory powers and responsibilities are divided among the Company’s Management Board members as follows: • Krzysztof Jałosiński, President of the Management Board and Chief Executive Officer: o Central Dispatch Division, o Fertilizers Business Unit, o Nitro Business Unit, o Internal Audit Division, o Marketing Division, o Strategy and Development Department, o Fertilizer Sales Department, o Human Resources and Management Department, o Public Relations Office, o Security Office. • Rafał Kuźmiczonek, Vice-President of the Management Board: o Technical Safety Department, o Laboratory Analysis Centre • Wojciech Naruć, Vice-President of the Management Board: o Finance Department, o Strategic Procurement Department. • Anna Podolak, Vice-President of the Management Board:

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o Pigments Business Unit, o Logistics Centre o Power Centre o Infrastructure Centre. As regards the division of duties among the Management Board members, the above-mentioned resolution also determines their powers and responsibilities in the coordination of business processes. The individual Management Board members supervise and coordinate the following business processes: • Krzysztof Jałosiński, President of the Management Board and Chief Executive Officer: o Strategic management, o Comprehensive customer support, o Human resources management, o Marketing. • Rafał Kuźmiczonek, Vice-President of the Management Board: o Technical and environmental safety. • Wojciech Naruć, Vice-President of the Management Board: o Financial management, o Financial controlling, o Availability of feedstocks and raw materials. • Anna Podolak, Vice-President of the Management Board: o Logistics support, o Production asset management, o Investment project management. 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 Company’s Management Board, Supervisory Board, and General Meeting. The President of the Management Board, or in his absence the Vice-President designated by the President, convenes, determines the agenda of and presides over Management Board meetings. 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, and 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 operations, • promoting a good corporate image of the Company, • 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 of 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 all procedures in and out of court, jointly with another Management Board member or proxy. Supervisory Board As at January 1st 2015, the composition of the Company’s Supervisory Board of the sixth term was as follows: • Paweł Jarczewski − Chairperson of the Supervisory Board, • Andrzej Skolmowski − Deputy Chairperson of the Supervisory Board, • Anna Tarocińska − Secretary of the Supervisory Board (representing the Company employees),

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• Marcin Likierski − Member of the Supervisory Board, • Maciej Lipiec − Member of the Supervisory Board, • Wiesław Markwas − Member of the Supervisory Board (representing the Company employees). In the reporting period, the following changes in the composition of the Company’s Supervisory Board occurred: • On May 26th 2015, Mr Maciej Lipiec resigned from the Supervisory Board10; • As of May 27th 2015, by virtue of Resolution No. 17 of the Annual General Meeting, Ms Patrycja Zielińska was appointed to the Supervisory Board.11 As at December 31st 2015, the composition of the Supervisory Board, consisting of six members, was as follows: • Paweł Jarczewski − Chairperson of the Supervisory Board, • Andrzej Skolmowski − Deputy Chairman of the Supervisory Board, • Anna Tarocińska − Secretary of the Supervisory Board (representing Company employees), • Marcin Likierski − Member of the Supervisory Board, • Wiesław Markwas − Member of the Supervisory Board (representing Company employees), and • Patrycja Zielińska − Member of the Supervisory Board. After the end of the reporting period, Mr Paweł Jarczewski resigned from membership of the Supervisory Board, with effect from February 19th 2016. 12 On March 1st, the Company received a letter from the Minister of the State Treasury removing Mr Marcin Likierski from the Supervisory Board with effect from March 1st 2016 and appointment, with effect from the same date, of Mr Wojciech Wardacki to the Supervisory Board13. In accordance with the Company’s Articles of Association, the State Treasury as a shareholder has the right to appoint and remove one Supervisory Board member. Therefore, the composition of the Supervisory Board, consisting of five members, was as follows: • Andrzej Skolmowski − Deputy Chairman of the Supervisory Board, • Anna Tarocińska, − Secretary of the Supervisory Board (representing Company employees), • Wiesław Markwas, − Member of the Supervisory Board (representing Company employees), and • Wojciech Wardacki − Member of the Supervisory Board, • Patrycja Zielińska − Member of the Supervisory Board. 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, • Accountancy Act, • Company Articles of Association, and • Rules of Procedure for the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. Audit Committee On November 23rd 2009, the Supervisory Board established an Audit Committee (Resolution No. 342/IV/09) in order to improve the productivity 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.

10 The Company disclosed this information in Current Report No. 13/2015 ‘Resignation by Member of the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A.’ dated May 6th 2015. 11 The Company disclosed this information in Current Report No. 17/2015 ‘Appointment of a Supervisory Board Member’, dated May 27th 2015. 12 On February 19th 2016, the Company received a notification on resignation of Mr Paweł Jarczewski from the position of Chairman of the Supervisory Board. The Company disclosed this information in Current Report No. 7/2016. 13 The Company disclosed this information in Current Report No. 10/2015 ‘Appointment and removal of a Supervisory Board Member’, dated March 2nd 2016.

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During the reporting period, there was no change in the composition of the Parent’s Audit Committee, and as at December 31st 2015 it was as follows: • Andrzej Skolmowski − Chairman of the Audit Committee, • Anna Tarocińska − Secretary of the Audit Committee, and • Paweł Jarczewski − Member of the Audit Committee. After the resignation of Mr Paweł Jarczewski from Supervisory Board membership (with effect from February 19th 2016) and the appointment of a new member of the Committee by the Supervisory Board Resolution of March 2nd 2016, the composition of the Audit Committee was as follows15: • Andrzej Skolmowski − Chairman of the Audit Committee, • Anna Tarocińska − Secretary of the Audit Committee, • Patrycja Zielińska − Member of the Audit Committee. The Supervisory Board intends to appoint a successor at the next meeting. The Audit Committee’s tasks include in particular: • monitoring of the financial reporting process, • monitoring of the effectiveness of internal financial control, internal audit and risk management systems in place at the Company, • monitoring of financial audit activities, • monitoring of the independence of the qualified auditor and the entity qualified to audit financial statements, also in the case of its provision of services referred to in Art. 48.2 of the Act on Qualified Auditors, Their Self-Government, Entities Qualified to Audit Financial Statements and on Public Supervision, dated May 7th 2009, • recommending to the Supervisory Board an entity qualified to audit financial statements in order to perform the financial audit of 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. 341/IV/09 of the Parent’s Supervisory Board of November 23rd 2009, and amended by Resolution No. 10/VI/2013 of the Supervisory Board of July 31st 2013. 8.12. Remuneration and additional benefits Pursuant to Resolution No. 4 of the Company’s Extraordinary General Meeting of October 20th 2010 on amendment to the Company’s Articles of Association, remuneration rules and the amount of remuneration for the Management Board members are determined by the Supervisory Board. On November 8th 2011, by Resolution No. 557/V/11, the Supervisory Board established new remuneration rules and the amount of remuneration for members of the Company’s Management Board. The Resolution was later amended by the Supervisory Board by Resolutions No. 594/V/12 of March 13th 2012, No. 45/VI/14 of January 9th 2014 and, in the reporting period, by Resolution No. 156/VI/15 of June 9th 2015. By Resolution No. 47/VI/14 of January 9th 2014, the Supervisory Board adopted the ‘Rules of the annual bonus scheme for members of the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A.’ In the reporting period, the Resolution was amended by the Supervisory Board by Resolutions No. 97/VI/15 of February 11th 2015 and No. 146/VI/15 of June 9th 2015. On October 20th 2011, the Extraordinary General Meeting of the Company adopted Resolution No. 3 on the determination of remuneration rules and the amount of remuneration for members of the Company’s Supervisory Board.14 On April 25th 2012, the resolution was revised by Resolution No. 18 of the Extraordinary General Meeting. The revision covered the provisions on remuneration for the Supervisory Board members of the Company who are also members of the Management Board of Grupa Azoty S.A. - the majority shareholder.15 The remuneration rules for members of the Company’s Supervisory Board did not change in 2015.

14 The Company disclosed this information in Current Report No. 51/2011 ‘Resolutions adopted by the Extraordinary General Meeting of Z.Ch. Police S.A. on October 20th 2011’, dated October 20th 2011. 15 The Company disclosed this information in Current Report No. 19/2012 ‘Resolutions adopted by the General Meeting of Z.Ch. Police S.A. of April 25th 2012’ dated April 25th 2012.

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Table 30.30 Remuneration of Supervisory Board members for holding office at the Company for the 12 months of 2015 Remuneration Remuneration Total paid due Likierski Marcin 60.0 - 60.0 Wiesław Markwas 60.0 - 60.0 Anna Tarocińska 66.0 - 66.0 Zielińska Patrycja 30.8 - 30.8 Lipiec Maciej 29.2 - 29.2

Total 246.0 - 246.0

Table 31. Remuneration of Management Board members for holding office at the Company for the 12 months of 2015 Remuneration Remuneration Total paid due Jałosiński Krzysztof 766.6 333.0 1 099.6 Kuźmiczonek Rafał* 443.8 189.0 632.8 Naruć Wojciech 716.7 270.0 986.7 Podolak Anna 569.4 270.0 839.4 Total 2,496.4 1,062.0 3,558.5 * agreement on holding the office of the employee-elected Management Board member

Table 32. Remuneration of the Company’s Management and Supervisory Board members for holding office at the Company’s subsidiaries, for the 12 months of 2015 Remuneration Remuneration Total paid due Likierski Marcin 26.1 - 26.1 Total 26.1 - 26.1

Remuneration Remuneration Total paid due Jałosiński Krzysztof 22.0 - 22.0 Podolak Anna 27.1 - 27.1 Total 49.1 - 49.1

8.13. Agreements between the Company and Management Board members Agreements executed with President of the Management Board, Mr Krzysztof Jałosiński, Vice- President of the Management Board, Mr Wojciech Naruć, and Vice-President of the Management Board, Ms Anna Podolak, provide that in the event of their removal from office or termination of the agreement for other reasons than a breach of material obligations under the employment contract, they will be eligible to a severance pay equal to six times their respective fixed gross monthly salaries. The agreement with the employee-elected Vice-President of the Management Board, Mr Rafał Kuźmiczonek, provides that if the employment contract is terminated following Mr Kuźmiczonek’s removal from the Company’s Management Board before the expiry of the term of office, he will be eligible to a severance pay equal to three times his fixed gross monthly salary. If the cause of removal from the Company’s Management Board is circumstances justifying termination of employment contract without notice due to fault of the employee in accordance with art. 52 of the Labour Code, the employee is not entitled to the compensation specified above.

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President of the Management Board Mr Krzysztof Jałosiński, Vice-President of the Management Board Mr Wojciech Naruć, Vice-President of the Management Board Ms Anna Podolak, and Vice- President of the Management Board Mr Rafał Kuźmiczonek have signed non-compete agreements expiring 12 months after their employment is terminated. They are therefore eligible to receive compensation for refraining from competition, equal to 100% of their fixed gross monthly salary specified in the employment contract. 8.14. Sponsorship, charitable and similar activities Brand image and product promotion activities are carried out through a number of cultural, educational, scientific, sports and other initiatives. Charitable activities of the Company are conducted based on the Donation Policy, setting out in detail the scope of support for charitable initiatives. Through donations, the Company actively responds to the needs voiced by foundations, associations and other organisations in the region. The Company is not engaged in any sponsorship activities.

9. Other material information and events 9.1. Audit firm Entity authorised to review and audit the Financial Statements for the financial year 2015: • KPMG Audyt Sp. z o.o., registered office at ul. Inflancka 4A, Warsaw, Poland, • Date of the agreement on the review and mandatory audit: June 23rd 2015, • Term of the agreement: review and audit of financial statements for 2015 and 2016 Table 33. Auditors’ fees Item 2015 2014 Audit of the full-year separate and consolidated financial statements 98 117 of the Company (the Group) and audit of the consolidation package Review of the half-year separate and consolidated financial statements of the Company (the Group) and review of the 49 59 consolidation package Other services 60 30 Total 207 206

9.2. Litigation On October 31st 2011, the Company filed a petition with the Court of Arbitration at the Polish Bank Association in Warsaw, through the J. Chałas i Wspólnicy law firm of Warsaw. Parties to the proceedings were: • Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna - the petitioner • Bank Polska Kasa Opieki Spółka Akcyjna - the respondent The petition concerned a Grupa Azoty Zakłady Chemiczne Police S.A. compensation claim for damage suffered in connection with derivative transactions. The Company argued that due to PEKAO S.A. negligence and breach of applicable laws the Company executed unfavourable transactions involving derivative instruments16. The Court of Arbitration at the Polish Bank Association dismissed the petition in its decision of September 20th 2012. On December 21st 2012, a petition was filed for revocation of the award of the Court of Arbitration at the Polish Bank Association. The court did not grant the petition for revocation of ruling of the Court of Arbitration at the Polish Bank Association in the case against PEKAO S.A. On December 9th 2013, the Company, acting through a law firm, appealed against the decision of the Regional Court in Warsaw dismissing the complaint against the ruling of the Court of Arbitration.

16 The Company disclosed this information in Current Report No. 58/2011 ‘Initiation of proceedings before the Court of Arbitration’ of October 31st 2011.

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On November 13th 2014, the Court of Appeals dismissed the Company’s appeal for the reversal of the ruling of the Court of Arbitration as a result of the petitioner’s appeal against the ruling of the Regional Court of Warsaw of September 25th 2013. The Company is not a party to any other proceedings before any court, arbitration tribunal, or public administration body, conducted in connection with receivables or liabilities of the Company whose value would be equal to at least 10% of the Company’s equity, nor is it a party to two or more proceedings concerning liabilities or receivables whose total value would be equal, respectively, to at least 10% of the equity of Grupa Azoty Zakłady Chemiczne Police S.A. 9.3. Environmental performance The Company constantly monitors its readiness to meet the environmental requirements imposed by relevant laws. The Company actively participates in social consultations of proposed legal acts. Since January 9th 2014, the Company has held a new integrated permit meeting the requirements imposed by the IED Directive. The new permit has been granted for an unspecified time and covers all installations on the Company’s premises. In 2015, the Company obtained three decisions amending the integrated permit. The changes were dictated, among others, by the need to ensure the permit’s compliance with new legal regulations. The Company was the first in Poland to prepare and file a Baseline Report. The condition of soil and ground water on the Company’s premises was examined at the beginning of 2013. The Company performs regular assessment of the risk of soil, land and groundwater contamination with hazardous substances from the Company’s units and installations. The assessment, performed in accordance with the ‘Assessment of soil, land and groundwater contamination risk’ scheme approved by the Marshal Office, did not reveal any risk of soil or groundwater contamination. New provisions of the environmental protection law, transposing the IED Directive, introduced new requirements applicable to the titanium white manufacturing unit. As of January 2015, new emissions standards and requirements for air pollution emissions monitoring apply. Maintaining the work of air protection systems (mainly a desulfurization unit) and continuous monitoring system are necessary to meet these requirements. The Regulation of Minister of the Environment of November 4th 2014 on emission standards for certain units, fuel combustion sources, as well as waste incineration and co-incineration equipment introduces, as of January 1st 2016, new, more restrictive emissions standards for fuel combustion installations. The new standards apply to sulfur dioxide, nitric oxides and particulate matter emission limits. The Industrial Emissions Directive and Environmental Protection Law provide for mechanisms postponing the effective date of the more restrictive emissions standards. One such mechanism is the Transitional National Plan (TNP). The fuel combustion sources including the EC II CHP plant have been submitted for inclusion in the TNP. According to the TNP derogatory mechanism, for combustion sources of the EC II CHP plant, from January 1st 2016 to June 30th 2020 the emission limits “will be calculated for each year as a moving average”. In order to avoid exceeding the emission limits set out in the TNP, the EC II CHP plant will require timely completion of investments aimed at reducing its output of NOx, SO2 and particulate matter. The risk related to BAT conclusions, which have not yet been defined for the Company’s installations, remains unchanged. The period for adapting production units to the emission levels specified in BAT conclusions is four years. REACH Regulation of the European Parliament and of the Council No. 1907/2006 REACH has introduced an EU-wide requirement to register manufactured or imported chemical substances and prepare health and environmental safety assessments for those chemical substances. The regulation provides mechanisms to prohibit or restrict the production and use of particularly dangerous substances. It also requires manufacturers and importers to advise downstream users of the conditions of their safe use on their own or as a constituent of other products, and specifies the design of the related documentation (safety data sheet). The regulation also requires downstream users to handle chemicals in compliance with supplier instructions. The Company has fulfilled the obligation to register all substances it manufactures. The Company has prepared and published safety data sheets (or equivalent documents) in accordance with REACH requirements for all marketed products, and updates those documents on an ongoing basis as

Grupa Azoty Zakłady Chemiczne Police S.A. Page 55 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated) required. The Company fulfils its obligations as a downstream user of chemical substances on a regular basis. It does not produce any chemicals whose production or use would be banned or restricted. The Company does not manufacture chemical substances in quantities from 10 to 100 tonnes per year covered by the registration requirement in 2012, or in quantities from 1 to 10 tonnes per year covered by the registration requirement in 2018. In 2014, a substance manufactured by the Company, titanium dioxide (a base component of TYTANPOL pigments), was entered in the list of substances to be assessed under the Community Rolling Action Plan (CoRAP). An assessment based on the updated registration documents will be made in 2016. In 2015, the European Chemicals Agency (ECHA) assessed the formal compliance of titanium dioxide registration documents with the REACH regulation and issued a decision specifying the required amendments in the documentation. The lead registrant appealed against the decision and requested a review by the ECHA Board of Appeals. By the end of 2015, there was no final decision on this matter. 9.4. Awards and distinctions On January 9th 2015, the Company received the Konik Morski (Sea Horse) statuette from the Business Club Szczecin Association for the Development of Szczecin and West Pomerania, for its contribution to the region’s economic development. On May 7th 2015, the Company was awarded the title of “Zachodniopomorski Orzeł Eksportu” (West Pomerania Export Eagle) in the categories of Best Exporter and Best Export Product. Krzysztof Jałosiński, President of the Company’s Management Board, earned the title of Export Personality. On November 5th 2015, the Company was awarded the Diamentowy Matrix (Diamond Matrix) prize in the Internship category, by the West Pomerania Business School. On November 19th 2015, Grupa Azoty Zakłady Chemiczne Police S.A. received the Wybitny Eksporter Roku (Exporter of the Year) award.

10. Events after the end of the reporting period No transactions in Company shares were executed by the management or supervisory staff after the end of the reporting period. According to the list of persons entitled to participate in the Extraordinary General Meeting called for February 16th 2016, provided to the Company by the CSDP, OFE PZU Złota Jesień registered 11,650,000 shares, which is equivalent to an increase of its interest in the Company’s share capital to 15.53%. On February 19th 2016, the Company received a notification on resignation of Mr Paweł Jarczewski from the position of Chairman of the Supervisory Board. The Company reported on the resignation in Current Report No. 7/2015.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 56 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated)

Index of tables Table 1. Number of employees ...... 6 Table 2. Number of employees: average annual and as at the end of 2015 ...... 6 Table 3. Employee turnover from January 1st to December 31st 2015 ...... 7 Table 4. Employment by summary education ...... 7 Table 5. Employment by length of service ...... 7 Table 6. Company’s production volume by product [tonnes] ...... 9 Table 7. Revenue by segment ...... 9 Table 8. Agreements significant for the Company’s business ...... 12 Table 9. Company’s financial performance ...... 20 Table 10. EBIT by segment in 2015 ...... 21 Table 11. EBIT by segment in 2014 ...... 21 Table 12. Operating expenses ...... 24 Table 13. Other expenses [%]...... 24 Table 14. Structure of assets ...... 25 Table 15. Structure of equity and liabilities ...... 26 Table 16. Profitability ratios ...... 26 Table 17. Liquidity ratios...... 27 Table 18. Operating efficiency ratios ...... 27 Table 19. Debt ratios...... 28 Table 20. Summary of the Parent’s bank deposits as at December 31st 2015 ...... 29 Table 21. Material financing agreements signed or amended by an annex in 2015 and by the date of this Report...... 29 Table 22. Guarantees issued and amended by annex in 2015 upon instruction from Grupa Azoty Group companies ...... 31 Table 23. Company shares held by management personnel ...... 38 Table 24. Parent shares held by supervisory personnel ...... 38 Table 25. Recommendations concerning the Company shares, issued between January 1st 2015 and the date of this report ...... 40 Table 26. Share price performance ...... 40 Table 27. Shareholding structure as at the date of this Report ...... 44 Table 28. Shareholding structure as at December 31st 2015 ...... 45 Table 29. Shareholding structure as at December 31st 2014 ...... 45 Table 30. Remuneration of Supervisory Board members for holding office at the Company for the 12 months of 2015 ...... 53 Table 31. Remuneration of Management Board members for holding office at the Company for the 12 months of 2015 ...... 53 Table 32. Remuneration of the Company’s Management and Supervisory Board members for holding office at the Company’s subsidiaries, for the 12 months of 2015 ...... 53 Table 33. Auditors’ fees ...... 54

Grupa Azoty Zakłady Chemiczne Police S.A. Page 57 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated)

Index of figures Figure 1. Structure of the Group as at December 31st 2015: ...... 5 Figure 2. Company organisational chart as at December 31st 2015 ...... 6 Figure 3. Revenue by main product groups and other sales ...... 10 Figure 4. 2015 sales by geographical regions ...... 11 Figure 5. Structure of expenditure by project type ...... 16 Figure 6. Monthly average prices of NPK and DAP fertilizers in 2015 [USD/t] ...... 18 Figure 7. Monthly average prices of ammonia and urea in 2015 [USD/t] ...... 19 Figure 8. Monthly average prices of titanium white in 2015 [EUR/t] ...... 19 Figure 9. Revenue by segment ...... 21 Figure 10. Revenue of the Fertilizers Segment ...... 22 Figure 11. Revenue of the Pigments Segment ...... 22 Figure 12. Revenue by product group ...... 23 Figure 13. Revenue by product group ...... 23 Figure 14. Grupa Azoty Zakłady Chemiczne Police S.A. share performance in 2015 ...... 39

Grupa Azoty Zakłady Chemiczne Police S.A. Page 58 of 59 Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 (all figures in PLN ‘000 unless otherwise stated)

This Directors’ Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2015 contains 59 pages.

Signatures of the Members of the Management Board

……………………………… Krzysztof Jałosiński President of the Management Board

……………………………… ……………………………… ……………………………… Rafał Kuźmiczonek Wojciech Naruć Anna Podolak Vice-President of the Vice-President of the Vice-President of the Management Board Management Board Management Board

Police, March 8th 2016

Grupa Azoty Zakłady Chemiczne Police S.A. Page 59 of 59