Consolidated half -year report including Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for H1 2018

Grupa Azoty Zakłady Chemiczne Police Group

Contents 1. General information about the Group ...... 3 2. Financial condition and assets ...... 5 2.1. Assessment of non-recurring factors and events having a material impact on the Group’s operations and financial performance...... 5 2.2. Market overview ...... 7 2.3. Key financial and economic data ...... 12 2.3.1. Consolidated financial results ...... 12 2.3.2. Segments’ financial results ...... 14 2.3.3. Operating expenses ...... 16 2.3.4. Structure of assets, equity and liabilities ...... 16 2.3.5. Financial ratios ...... 18 2.4. Financial liquidity...... 19 2.5. Borrowings ...... 20 2.6. Key projects ...... 22 2.7. Factors which will affect the Group’s results over at least the next reporting period ...... 24 3. Risks and threats ...... 26 3.1. Strategic management ...... 26 3.2. Management of fixed production assets ...... 27 3.3. Comprehensive customer support ...... 29 3.4. Financial management ...... 31 4. Other information ...... 31 4.1. Other material events ...... 31 4.2. Significant agreements ...... 32 4.3. Sureties and guarantees ...... 33 4.4. Shareholding structure ...... 37 4.5. Parent shares held by management and supervisory personnel...... 37 4.6. Composition of the Management Board and the Supervisory Board ...... 37 4.7. Environmental performance ...... 41 5. Other information ...... 42

Grupa Azoty Zakłady Chemiczne Police Group Page 2 of 43

Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the Group’s operations in H1 2018 (all amounts in PLN '000 unless indicated otherwise)

1. General information about the Group As at June 30th 2018, the Grupa Azoty Zakłady Chemiczne Police Group comprised Grupa Azoty Zakłady Chemiczne Police S.A. (the “Parent”, the “Company”) and:  eight subsidiaries (in which Grupa Azoty Zakłady Chemiczne Police S.A. held ownership interests above 50%), including one company in liquidation,  two associates (in which the Company held ownership interests below 50%), including one company in liquidation bankruptcy. The Company has for decades been a leading European manufacturer of fertilizers and one of the largest Polish chemical companies. With significant volumes of sales to foreign markets, the Company is also one of the largest Polish exporters. The Company’s advantages include a titanium white unit of a type unique in Poland, the size of its ammonia, phosphoric acid and sulfuric acid production, and the strong position in the market for compound mineral fertilizers. Internationally, the Company is appreciated not only for its fertilizer production and sales volumes, but also for contributing to the development of the chemical industry and global agriculture. The Company pays due regard to CSR matters, engaging in projects that support local communities and regional development. Liaising with local authorities, Grupa Azoty Zakłady Chemiczne Police S.A. supports vocational education, with a particular focus on professions useful to the Company. The Company has also established links with higher education institutions, sharing expertise with students majoring in chemistry, environmental protection, management and marketing. Upon graduation, some of them move on to become Company employees. Table 1. Parent’s interests in subsidiaries as at June 30th 2018 Registered Share % of shares held Entity office/address capital by the Parent ul. Kuźnicka 1, Grupa Azoty Police Serwis Sp. z o.o. 9,618 100.00 72-010 Police, Poland

ul. Kuźnicka 1, Koncept Sp. z o.o. 512 100.00 72-010 Police, Poland ul. Monopolowa 6, Supra Agrochemia 51-501 Wrocław, 19,721 100.00 Sp. z o.o. Poland Transtech Usługi Sprzętowe ul. Kuźnicka 1, 9,783 100.00 i Transportowe Sp. z o.o. 72-010 Police, Poland

Grupa Azoty Route de Ngor Villa No. XOF 132,000 Africa S.A. w likwidacji (in 99.99 12, Dakar, Senegal thousand liquidation)

Zarząd Morskiego Portu Police Sp. z ul. Kuźnicka 1, 32,642 99.91 o.o. 72-010 Police, Poland

ul. Kuźnicka 1, PDH Polska S.A. 304,000 59.93 72-010 Police, Poland

Infrapark Police S.A. ul. Kuźnicka 1, 14,986 54.43 w likwidacji (in liquidation) 72-010 Police, Poland

Budchem Sp. z o.o. ul. Moczyńskiego 8/10, 1,201 48.96 in liquidation bankruptcy 70-101 Szczecin, Poland

ul. Kuźnicka 6, Kemipol Sp. z o.o. 3,445 33.99 72-010 Police, Poland

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Changes in the structure of business entities On March 29th 2018, AFRIG S.A. announced its insolvency and filed a petition in bankruptcy with the Commercial Court of Dakar, Senegal1. Following the execution of a termination agreement, including annexes, with DGG Eco Sp. z o.o., on May 30th 2018 the shares in AFRIG S.A. (acquired under an agreement of August 28th 2013) were returned to the seller. As a result, on May 30th 2018 the Parent lost control of the subsidiary AFRIG S.A. and, indirectly, of AFRIG Trade SARL. For details, see Section 2.1 of this report. On November 10th 2017, an Extraordinary General Meeting of the subsidiary PDH Polska S.A. resolved to increase the company’s share capital by PLN 124,000 thousand. In Q1 2018, payments for the new shares of PLN 7,500 thousand and PLN 23,500 thousand were made by the Company and Grupa Azoty S.A., respectively. As at March 31st 2018, PDH Polska S.A. disclosed in its interim condensed statement of financial position the share capital after the increase, in the aggregate amount of PLN 304,000 thousand. On April 9th 2018, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered the increase of PDH Polska S.A.’s share capital. Following the registration, the share capital of PDH Polska S.A. amounts to PLN 304,000 thousand, including paid-up capital of PLN 211,000 thousand. Since April 9th 2018, the Company has held 59.93% of the subsidiary’s share capital and 84.54% of the total voting rights at its General Meeting (votes attached to shares which were fully paid-up). The rest of PDH Polska S.A.’s share capital will be paid up by the shareholders by September 1st 2018 in accordance with the resolution of the subsidiary’s General Meeting, dated November 10th 20172. Group subsidiaries: Grupa Azoty POLICE Serwis Sp. z o.o. The subsidiary was registered on March 15th 2002 under No. 0000099823 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company’s business includes overhauls and project execution in the mechanical and construction industries (construction of systems and apparatuses, including those made of plastics, maintenance services, workshop services, treatment of metals, and technical supervision services), project execution and technical and engineering services in the areas of automation and power engineering, repairs of control and instrumentation equipment and power generation plant and equipment, plant engineering in automatics and power generation, including plant engineering in process control and visualisation systems. Koncept Sp. z o.o. The subsidiary was registered on September 6th 2001 under No. 0000041533 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company’s business consists in the provision of design services for the construction, assembly, mechanical, electrical, automation and measurement, and technological industries (including preparation of expenditure and investment estimates). The company specialises in design work for the chemical industry (manufacture of ammonia, urea, compound fertilizers, phosphoric and sulfuric acid, and titanium pigment), as well as printing and binding services. Supra Agrochemia Sp. z o.o. The subsidiary was registered in the Commercial Register on December 29th 2000 And later re- registered in the National Court Register under No. 00000138374 by the District Court for Wrocław- Fabryczna of Wrocław, 6th Commercial Division of the National Court Register. Its business comprises revitalising post-industrial sites owned by the company and preparing them for the purposes of redevelopment projects. Transtech Usługi Sprzętowe i Transportowe Sp. z o.o. The subsidiary was registered on April 2nd 2001 under No. 00003660 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company provides transport services, plant and equipment services, and workshop services (repair of battery-electric trucks, stackers, passenger cars, delivery vans, lorries, loaders, diggers, bulldozers and mobile cranes) as well as periodic inspection services.

1 For details, see also Current Report No. 9/2018 of March 29th 2018 – Insolvency of African Investment Group S.A., a subsidiary, and request to institute bankruptcy proceedings in respect of the company. 2 For details, see Current Report No. 12/2018 of April 10th 2018 – Court registration of share capital increase at subsidiary.

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Grupa Azoty Africa S.A. w likwidacji (in liquidation) The company has been in liquidation since May 12th 2017. Zarząd Morskiego Portu Police Sp. z o.o. The subsidiary was registered on December 13th 2004 under No. 0000223709 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The Municipality of Police holds a minority interest in the company. The company’s business comprises sea port operation, port construction, property management, research work, sea and inland shipping, and coastal water transportation services. The subsidiary is a port authority within the meaning of the Act on Sea Ports and Harbours. PDH Polska S.A. The subsidiary was registered on September 24th 2015 under No. 0000577195 by the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register. The company’s purpose is to construct a PDH unit for propylene production with related infrastructure, auxiliary systems and inter-unit connections, and extension of the Police sea port facilities to include a handling terminal for chemicals that would provide the required logistics infrastructure for receiving and storing the raw material. Infrapark Police S.A. w likwidacji (in liquidation) The company is in liquidation and is not conducting any business. Associates: Budchem Sp. z o.o. w upadłości likwidacyjnej (in liquidation bankruptcy) The company was registered in the Commercial Register on October 14th 1999 and later re-registered in the National Court Register under No. 0000135223 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The majority shareholder is WB Technika Sp. z o.o. The company is in liquidation bankruptcy and does not trade. Kemipol Sp. z o.o. The company was registered in the Commercial Register on December 18th 1990 and later re- registered in the National Court Register under No. 0000119127 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The majority shareholder is Kemira Kemi AB from Sweden. The remaining shares are held by the Company and Bank Ochrony Środowiska S.A. The company’s business consists in the manufacturing and sale of chemicals for water purification and wastewater treatment.

2. Financial condition and assets 2.1. Assessment of non-recurring factors and events having a material impact on the Group’s operations and financial performance Dividend On June 4th 2018, the Company Annual General Meeting passed a resolution to distribute dividend for 2017. The amount allocated to dividend payments was PLN 39,750 thousand, translating into dividend per share of PLN 0.53. The dividend was payable in respect of all Company shares (75,000,000). The dividend record date was set on July 10th 2018, while the dividend payment date fell on July 24th 20183. On April 25th 2018, the Annual General Meeting of KEMIPOL Sp. z o.o. passed a resolution to distribute dividend for 2017. The dividend was paid on July 16th 2018. Loss of control over subsidiary African Investment Group S.A. The Parent lodged a claim against DGG Eco Sp. z o.o. for refund of undue tranches of the purchase price for a 55% interest in African Investment Group S.A. The price tranches were not due as AFRIG had failed to produce phosphate rock volumes provided for in the agreement. On December 20th 2017, the parties signed a termination agreement (confirmed by court settlement) providing for

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

Page 5 of 43 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the Group’s operations in H1 2018 (all amounts in PLN '000 unless indicated otherwise) withdrawal from and reversal of the legal effects of the agreement of August 28th 2013 for purchase of the majority interest in AFRIG S.A. The consequences of the agreement (settlement) taking legal effect, involving mutual recovery of performance under the purchase agreement being terminated, were made conditional upon a refund of the first tranche of the price and creation of security for repayment of the balance by February 28th 2018. As DGG Eco Sp. z o.o. had failed to meet these conditions, the settlement was not consummated by the originally set date. As a result of further negotiations, an annex to the agreement was signed on May 22nd/23rd 2018, amending the terms of its consummation and mutual recovery of performance. In accordance with the annex, on May 30th 2018 the Parent confirmed that the shares in AFRIG S.A. had been transferred back to DGG Eco Sp. z o.o. Key terms and conditions of the termination agreement between the Parent and DGG Eco Sp. z o.o. are as follows:  DGG Eco Sp. z o.o. is to refund the amounts paid by the Parent towards the purchase price for the shares, i.e. the entire amount of USD 28,850 thousand, in instalments payable over five years, the first one due by December 31st 2018 and the last one – by December 31st 2023,  the Parent is to cancel its trade receivables from AFRIG S.A. in the total amount of EUR 11,090 thousand and USD 1,258 thousand (in aggregate, equivalent to PLN 51,942 thousand),  the Parent, as a co-borrower, is to take over the obligation to repay the loan granted by BGŻ BNP Paribas S.A. to finance the operations of AFRIG S.A., drawn in the amount of EUR 20,079 thousand (equivalent to PLN 86,734 thousand),  AFRIG S.A. is to remain liable towards the Parent for the repayment of the drawn portion of the loan and its servicing. In order to secure the performance of the settlement, DGG Eco Sp. z o.o. submitted a declaration of voluntary submission to enforcement under Art. 777 of the Code of Civil Procedure regarding the obligation to refund the above amount. Nevertheless, in the Parent’s opinion, given especially the fact that AFRIG S.A. (whose future operations, according to DGG Eco Sp. z o.o., are to serve as the source of financing to satisfy the Company’s claims) has declared insolvency (filing a petition in bankruptcy on March 29th 2018) and that tax enforcement proceedings have been instituted against it, as well as the fact that DGG Eco Sp. z o.o. failed to fulfil its original obligation to secure the refund of the price for the shares in AFRIG S.A. by a bank guarantee, the fair value of the amount due from DGG Eco Sp. z o.o. for the re-transfer of the shares in AFRIG S.A. was initially recognised at USD 3,000 thousand (equivalent to PLN 11,160 thousand). The estimate was substantiated by an actual inflow of funds after the reporting date. The Parent still has a recourse claim against AFRIG S.A. with regard to the obligation to repay the equivalent of the loan drawn by the subsidiary (EUR 20,079 thousand plus service costs). In view of the insolvency of AFRIG S.A., the amount to be repaid was recognised at nil fair value on initial recognition in the consolidated statement of financial position. Cancellation of trade receivables from AFRIG S.A. with the debtor’s consent, which in the previous years constituted income due but not received by the Parent, reduced the income tax expense by PLN 8,211 thousand. Following the loss of control over AFRIG S.A., as of May 30th 2018 AFRIG S.A.’s net assets of PLN 137,250 thousand, adjusted for cancelled receivables of the Parent (PLN 51,942 thousand), adjusted for loan liabilities assumed by the Parent (PLN 86,734 thousand) and negative non-controlling interests (PLN 61,734 thousand), were excluded from the Group’s consolidated statement of financial position, with the effect recognised in consolidated profit/(loss) for the current period. Also taken into account in recognising the effect of AFRIG S.A.’s exclusion from consolidated financial statements was the fair value of receivables from DGG Eco for the re-transfer of AFRIG shares (PLN 11,160 thousand). The total effect of the loss of control over the subsidiary AFRIG S.A. on consolidated net profit/(loss) is presented below. Table 2. Effect of loss of control over the subsidiary AFRIG S.A. on the consolidated results. Item Effect Finance costs Effect of loss of control over subsidiary -52,205 Profit/(loss) before tax -52,205 Income tax 8,211

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Net profit/(loss) -43,994

The total effect of the loss of control over the subsidiary AFRIG S.A. on the Company’s separate net profit/(loss) was PLN 14,145 thousand. For detailed information, see Section 2.3 of the interim condensed separate financial statements for the six months ended June 30th 2018.

Prices of CO2 emission rights

Since early 2018, the prices of CO2 emission rights on the exchange market have been going up, a trend observed since May 2017. From EUR 7.77 on January 2nd, the closing price of EUA rose to EUR 14.95, up 92%, at the end of the first half of 2018. On May 29th, EUA prices on the exchange market peaked at EUR 16.29, and afterwards started to decline slightly, to EUR 14.22 in June. Until the end of H1 2018, they oscillated around EUR 15. As regards market fundamentals, the uptrend has been supported by high energy prices (the higher the energy prices, the stronger the demand for EUA). Currently, the market is predominantly taking speculative positions on the exchange market, expecting the prices of emission allowances to continue trending up. Changes in key market conditions The first half of 2018 saw an unexpected, sharp increase in the spot prices of gas in Europe, which in early March went over the record levels from six years before. Despite improved weather conditions in the last two weeks of March and lower demand from households, gas prices continued at much higher levels than in the corresponding period of the previous year, owing to largely depleted gas stocks across Europe. At the same time, the market prices of ammonia continued trending downwards until May, leading to a further mismatch between the rising variable costs of ammonia production and the falling prices of the product. The ammonia prices started to inch up in May, sending a positive market signal, but the extent of their increase was insufficient to offset the persistently high prices of gas. Agricultural market Economic conditions in agriculture deteriorated due to a combination of bad weather and prices of agricultural produce. Grain crops in Poland in the first half of 2018 were badly impacted by a spell of harsh weather at the end of February and beginning of March, excessive soil moisture in April, and the agricultural drought in May and June. The financial health of some distribution companies suffered from the downturn in the agricultural sector, continuing for the third season in a row. As a result, they were not always able to collect and pay for fertilizers in a timely manner. Another important factor affecting the Polish fertilizer manufacturing industry, in which the home market plays the key role, were significant imports of competitively priced products. In addition, the German market, which is the second most important direction for Polish fertilizer sales, saw the introduction of restrictions on the use of nitrogen fertilizers, which will affect all manufacturers, reducing sales volumes on that market.

2.2. Market overview FERTILIZERS Agricultural market – Poland The first quarter of 2018 saw a decline in the prices of crops, especially wheat and rapeseed. Bad weather conditions, continuing until the first half of March, had an adverse effect on winter crops. The excessive soil moisture and increased incidence of plant diseases caused by fungi, accompanied by rapid temperature drops in the absence of snow cover in February and March over some parts of Poland, increased farmers’ concerns about the ability of their crops to overwinter in a healthy condition. The first signs of winter losses were already recorded in late February, forcing farmers to terminate or re-sow their crops. Eventually, field work, including application of fertilizers and crop protection chemicals, began in late March. The 2018/2019 cereal yields in Poland have been forecast at approximately 30m tonnes, slightly down on the previous season (by approximately 0.4m tonnes).

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In Q2 the weather improved, but long spells without rain resulted in a drought threat. From May 1st to June 30th 2018, spring grains, covering 40.28% of all arable land, were the most drought-exposed crops. According to the Institute of Soil Science and Plant Cultivation (IUNG), certain crop yields may be at least 20% lower than their long-term averages. Commissions are being appointed by local authorities to assess the extent of damage caused by the long-term drought. There are signals that grains may be of inferior quality and that yields may be lower. Agricultural market – Europe and the world In June, the US Department of Agriculture (USDA) slightly lowered (by 0.4% relative to May) its forecasts of global grain production in the 2018/2019 season, taking account of the drought in Central and Eastern Europe, especially in some areas of the Russian Federation. Compared with the 2017/2018 season, global grain yields are forecast to increase by 0.4% (2.08 billion tonnes). Grain production may decline in some areas, including the US (down by 3%) and the CIS countries, comprising most post-Soviet republics (down by 6%), including the Russian Federation (down by 14%). Higher yields are expected in Canada (up by 7%), Brazil (up by 13%) as well as Australia and Argentina (up by about 17%). Grain production in the EU is expected to reach 304 million tonnes, a slight decrease (by 0.4%) on the previous year’s figure. USDA expects a rise in global consumption of grains (up 1%, to 2.1 billion tonnes) and a further increase in trading volumes. As a result, grain stocks at the end of the 2018/2019 season may shrink to 448 million tonnes (down by 9%), which is still a relatively high level. Ammonia A slowdown in the ammonia market, continuing over the first quarter of 2018, coupled with excess supply of the product led to significant declines in prices, persisting until April. In May, the market prices of ammonia rebounded, but at the end of June they were nowhere near the levels recorded in December 2017. On average, the market prices of ammonia in the first half of 2018 were 12% lower year on year. However, they continued on an upward trend in July and the first half of August. In the Netherlands, OCI secured additional volumes under spot transactions. The rising prices of gas made ammonia imports more economically viable than its production. In the Black Sea region, the product’s availability was limited as two out of the six ammonia production units in Togliatti were shut down for maintenance work, which reduced (by 30 thousand tonnes) ammonia supply to the market also in July and August. No transactions in the spot market were reported in the Baltic Sea area. Figure 1. Ammonia and urea prices [USD/t] 500 400 300 200 100 0

Urea Ammonia

Urea In Poland, demand for nitrogen fertilizers (including urea) in H1 2018 was in line with requirements in the period, which was definitely attributable to the prevailing weather conditions. In the EU, demand rebounded sharply in the second half of Q2 2018 despite a previous slowdown. Given the relatively good availability of nitrogen fertilizers on the market, the vast majority of agricultural producers put off their purchases until a later time (just before application) anticipating lower prices. The average urea prices in H1 2018 were 5% higher than in the same period of the previous year. After price hikes in Q1 2018, a slowdown was observed across global markets at the beginning of Q2, which translated into price declines. However, supply constraints in the second half of the second quarter of the year pushed urea prices back up. Export volumes from China and demand from India will continue to affect urea prices in the near term.

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Fertilizers In the first quarter of 2018, demand for phosphate fertilizers did not go up. Many farmers had fertilizer stocks available for the first application which, owing to the prevailing weather conditions, did not take place until late March. Early April saw the start of intensive farming activity: sowing of grains, maize and oilseed rape, with concurrent application of fertilizers and crop protection chemicals. As in previous years, in addition to Polish products distributors offered farmers NPK fertilizers imported from Norway, Finland, Russia and Belarus. Despite delayed commencement of agrotechnical work, the crops were growing well until mid-May, when the weather took a turn for the worse. According to estimates from at the end of June, due to the adverse weather conditions (lack of rainfall combined with high temperatures), potential losses might reach as much as 40% of the crops. In addition, farmers’ purchasing power was reduced during the spring season by delays in direct payments of EU funds and low prices of agricultural produce.

Figure 2. Prices of NPK, DAP [USD/t]

600 500 400 300 200 100 0

DAP NPK

Global market In Europe, low incomes in agriculture significantly constrained farmers’ purchasing power. The first half of 2018 saw continued weak demand, with the prices of basic NPK fertilizers relatively unchanged, rising slightly only in March and late June. Russian manufacturers placed their output mainly on the home market, selling their products also to South American and Indian customers, but did not make any significant transactions on the European market. A market upturn was seen only in April, mainly in Western Europe. The formulas invariably in high demand for several seasons include NPK 15-15-15, NPK 16-16-16, NPK 8-20-30/8-19-29, and NPK 10-26-26. DAP DAP prices were on the rise in January and February, to go down at the end of March and rebound slightly in May. The price of DAP at the end of H1 2018 was almost 12% higher than at the beginning of January 2018 (having followed a similar pattern as the year before, when the difference was close to 10%). This situation was driven on the one hand by cyclical increases in demand for DAP in those periods of the year, and on the other, by reduced production and delayed deliveries by certain manufacturers. The highest demand was observed in the markets of South America and Asia, where transaction volumes were the largest. In Europe, demand for DAP came mainly from Romania, Slovakia, Bulgaria and Serbia. RAW MATERIALS FOR MANUFACTURE OF FERTILIZERS Phosphate rock In H1 2018, two global price increases were recorded on the phosphate rock market. The first one, in January, was driven by price increases on the market of phosphate fertilizers, chiefly DAP. Despite difficult weather conditions in Morocco, which hampered both road and rail traffic, and loading operations at the Jorf Lasfar Port, as well as an unsuccessful attempt to re-launch phosphate rock production in Tunisia (where social protests prevented the material’s transport to fertilizer manufacturers), in February and March phosphate rock prices remained stable. The second global increase took place at the end of April. Overall, the average increase in phosphate rock prices in H1 2018 was approximately 2% relative to H1 2017.

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In H1 2018, local environmental audits were continued in China. They are already a kind of tradition as the authorities, acting under the pressure of influential opinion due to enormous environmental pollution in China, have ordered environmental and technical audits of various industrial sites, including phosphate rock mines and fertilizer industry facilities. Most of the phosphate rock mines were designed and built many years ago, which is why many of them do not meet the environmental and technical safety standards. As a result, certain mines in the Sichuan region have been permanently closed down. On the local market, the prices of 30% P2O5 phosphate rock for delivery in June were by approximately USD 15 per tonne higher than at the end of March, which was attributable to the environmental audits. Prices of phosphate rock have been rising. No details of planned price increases in Q3 2018 have yet been announced, but OCP’s direct negotiations, for instance with India, concerning phosphoric acid supplies (in H1 2018 alone, the prices of phosphoric acid supplied to India went up by 7%, and taking into account the price rise planned for the next quarter its increase will reach 10%), indicate that phosphate rock prices may go up further in Q3 and Q4 2018. The planned increase in the prices of phosphoric acid supplied to India may also be driven by the local government’s decision to close Sterlite’s metallurgical and fertilizers complex. The decision means a loss of approximately 490 thousand tonnes of production capacity (measured as the DAP equivalent), which is a significant quantity even for the enormous Indian market. Until it is decided whether production may be resumed at the complex, the shortage of phosphates will have to be partially offset by imports of phosphoric acid or phosphate rock, and partially by imported DAP, which will certainly feature in the negotiations between OCP and its customers in India. Potassium chloride Since early 2018, potassium chloride prices have been growing on most markets. At the beginning of the year, most major producers of potassium chloride announced that they had sold out their output until March/April, which, given that certain suppliers had reduced their production capacities in December 2017 and January 2018, brought about a steady increase in potassium chloride prices across target markets. Compared with the corresponding period of 2017, they increased by approximately 11% on average globally. However, after the late-2017 increases, the prices of potassium chloride were relatively stable in Q1 and Q2 2018. Despite pricing pressure from producers, owing to unfavourable weather in Europe and the United States demand for potassium chloride was modest. It was only in June that increases of approximately 2% in Western Europe and 5% in the US were confirmed. Negotiations with Chinese importers of potassium chloride held in the first half of the year did not prove conclusive with regard to the prices for 2018. In addition, in January and February China imported respectively 4% and 8% less potassium chloride in comparison with the same period of 2017. In H1 2018, stocks of potassium chloride in Chinese ports reached 2 million tonnes. It is crucial for the rest of the year that the price of potassium chloride sold to China be set, as it usually serves as a benchmark for exporters and importers on other markets. In India, negotiations for the supply of potassium chloride for 2018/2019 commenced in early May, which may explain higher stocks in ports, as importers seek to strengthen their negotiating positions. Analysts expect the price to increase by several per cent in 2018 and 2019. Its increase will probably be higher if the negotiations with China are concluded before those with India. In the first half of 2018, PotashCorp, the world’s leading producer of potassium chloride, merged with Agrium, the largest US distributor in the agro sector. The merged entity under the name of Nutrien has a potassium chloride production capacity estimated at 22 million tonnes. Nutrien is, through Canpotex (owned by Nutrien and Mosaic), the largest global supplier of potassium chloride. It will probably try to enhance its presence in Europe and increase its market share mainly at the expense of K+S. In the second quarter of this year, EuroChem announced a successful attempt at producing MOP from its Usolskiy mine in Perm Krai, Russia. Having reached its target production capacity, the Usolskiy mine is to be able to produce up to 3.7 million tonnes of MOP annually. The launch of EuroChem’s another mine (Volgakaliy) is also planned. Producing at their full capacities, both mines will jointly supply over 8 million tonnes of potassium chloride per year. On the other hand, K+S has faced some problems with its investment project in Canada (the Bethune mine). Currently, it is struggling with quality assurance problems concerning its final product, as well as with major mechanical incidents. All these issues have preliminary been scheduled to be solved in 2019.

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Sulfur In H1 2018, activity in the global sulfur market was subdued due to lower demand for phosphate fertilizers. This was particularly true on the Chinese market, as negotiations with Indian customers for phosphate fertilizers were still ongoing. In China, following their increase in February and stabilisation in March, sulfur prices began to climb again in mid-April. Practically since the end of early-May holidays, sulfur prices in China have been stable with no major fluctuation. In addition, demand for solid sulfur declined in eastern China, as some plants where environmental audits had revealed a number of irregularities were closed down. This pushed up demand for sulfuric acid, halted imports of solid sulfur from South Korea and depressed the price of the Korean product. During the Shanghai Cooperation Organisation Summit, held on June 9th, 10th and 11th 2018, further environmental restrictions were recorded, including with respect to ports where sulfur is reloaded. This is another signal from China of its fight against enormous environmental pollution caused by obsolete industrial technologies and infrastructure, which in turn may significantly affect the prices of raw materials on the local market. Since Q4 2017, the prices of refined sulfur in Western Europe have remained on an upward trend. Compared with the corresponding period in 2017, the average price of refined sulfur went up by approximately 15%. At the end of Q2 2018, negotiations commenced concerning contracts for liquid sulfur supplies to European customers. On the one hand, opinions are voiced that there is nothing to justify a price rise: while the stock levels are low, the majority of refineries are operating and their output should suffice to satisfy demand on the local market (even taking into consideration the continued shutdown at a large sulfur producer, the Großenkneten gas production facility in Germany). On the other hand though, exports to non-European countries are more profitable to suppliers, which may feature in their talks with European customers, resulting in higher prices for the third quarter of this year. Natural gas In the first half of 2018, gas prices on spot markets in Germany were approximately 20% higher than in the same period last year. The warmer beginning of the year, when gas prices fell reflecting lower demand from households, was not long. As a spell of severe winter weather hit Europe in the second half of February and the first days of March (caused by the Arctic air front with temperatures 10oC below the multi-year average), spot prices of gas on the European market soared to unprecedented levels, 50% above the previous high set six years before. Gas storage facilities across Europe were being emptied at an alarming rate, to levels by a dozen or so per cent lower than in the previous year, in Belgium and France having even come close to zero. Since April, increased demand related to gas stocks rebuilding across Europe has been putting significant pressure on gas prices. Similar pressure came from rising prices of the other energy carriers due to the prevailing geopolitical climate. Year on year, crude oil and coal prices rose by 35% and 12%, respectively. An additional factor driving up gas prices was a sharp rise in the prices of CO2 emission allowances (by approximately 140% year on year), making gas a more attractive option in the energy mix. The situation was aggravated by a number of both scheduled and unscheduled outages of gas production and transmission infrastructure in Norway, limiting gas supply to Europe. Other relevant factors included a series of earthquakes in the area of Groningen in the Netherlands, Europe’s largest continental gas field, and discussions whether to reduce gas production. In H1 2018, natural gas was purchased mainly from PGNiG S.A. due to economic and legal considerations. Figure 3. Market prices of natural gas [EUR/MWh] 25

20

15

10

Gas

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PIGMENTS Titanium white In the first half of 2018, the price of titanium white in Europe increased by 27.5% year on year. In Q2 2018 relative to Q1 2018, its market price also rose (by 1.8%). Demand and supply on the European market were finally balanced as a result of increased imports of titanium white from China, supported by favourable exchange rates and very weak demand on the local Chinese market caused by environmental inspections ordered by the state authorities. Demand in Q2 was lower than expected due to severe weather conditions and high stock levels built up by buyers ahead of the season. The slightly disappointing demand for titanium white was also correlated with the slowdown across the largest EU economies and uncertainty related to global trade and customs wars waged by Donald Trump. The re-launch of approximately 20% of production capacities of the titanium white plant in Pori, Finland, improved the availability of titanium white used in the printing inks segment. At the end of H1 2018, the prices of the Chinese product were reduced to maximise export volumes. Figure 4 Market prices of titanium white [EUR/t] 3 000

2 500

2 000

1 500

Titanium white

RAW MATERIALS FOR MANUFACTURE OF PIGMENTS Ilmenite and titanium slag A decline in China’s production volumes of titanium-containing minerals in 2016–2018 caused by the government-ordered environmental inspections led to increased imports of those minerals to China, triggering global price increases. Purchase prices of ilmenite and titanium slag increased significantly when denominated in local currencies, but a weaker US dollar helped alleviate the effect of this factor on production costs. In H1 2018, the average prices of ilmenite and titanium slag used by the Police plant rose by, respectively 11% and 6% year on year. In H1 2018, global markets continued to suffer from undersupply of titanium slag used in the manufacture of sulfate titanium white. CHEMICALS In the NOXY segment, despite significant competition among manufacturers, there was a further year- on-year increase in sales, both in Poland and on export markets. The Company’s RedNOX® segment (products designed to reduce nitric oxide emissions in the automotive and industrial industries) offers the following products: NOXY® (32.5% urea solution, AdBlue®); Likam® (ammonia water); Pulnox® (40% technical-grade urea solution). Iron sulfate is a by-product of titanium white and steel production. In H1 2018, demand for iron sulfate remained high across European markets. This was mainly due to the lack of the raw material from the Pori plant. The demand was also driven by the excellent economic situation in the construction segment, resulting in high cement production volumes.

2.3. Key financial and economic data 2.3.1. Consolidated financial results In H1 2018, the Group’s EBIT and EBITDA came in at, respectively, PLN 36,936 thousand and PLN 93,530 thousand. In the reporting period, the financial results of the Group were strongly correlated

Page 12 of 43 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the Group’s operations in H1 2018 (all amounts in PLN '000 unless indicated otherwise) with the Parent’s market environment, which proved particularly challenging for the Fertilizers Segment. Concurrently, following the loss of control over AFRIG S.A., as of May 30th 2018 AFRIG S.A.’s net assets adjusted for cancelled receivables of the Parent, adjusted for loan liabilities assumed by the Parent and negative non-controlling interests, were excluded from the Group’s consolidated statement of financial position, with the effect recognised in consolidated profit/(loss) for the current period. Also taken into account in recognising the effect of AFRIG S.A.’s exclusion from consolidated financial statements was the fair value of receivables from DGG Eco for the re-transfer of AFRIG shares. The effect of the above events on the Group’s consolidated net profit/(loss) was PLN -43,994 thousand. As a result, the Group posted a consolidated net loss of PLN 14,545 thousand for H1 2018. Table 3. Consolidated financial data Item H1 2018 H1 2017 change % change Revenue 1,245,322 1,349,918 -104,596 -7,7 Cost of sales 1,067,615 1,081,297 -13,682 -1,3 Gross profit 177,707 268,621 -90,914 -33,8 Selling and distribution expenses 53,717 50,976 2,741 5.4 Administrative expenses 79,435 82,504 -3,069 -3.7 Net profit on sales 44,555 135,141 -90,586 -67.0 Other income/(expenses) -7,619 -7,862 243 -3.1 EBIT 36,936 127,279 -90,343 -71,0 Finance income/(costs) -56,112 -6,142 -49,970 813.6 Share of profit/(loss) of equity-accounted 6,910 6,640 270 4.1 associates Profit before tax -12,266 127,777 -140,043 -109.6 Income tax 2,279 27,549 -25,270 -91.7 Net profit/(loss) -14,545 100,228 -114,773 -114.5 EBITDA 93,530 177,407 -83,877 -47.3

In H1 2018, the Company posted a separate net profit of PLN 52,649 thousand. Table 4. The Group’s and the Company’s financial results H1 2018 H1 2018 Item difference consolidated separate Revenue 1,245,322 1,240,260 5,062 Net profit/(loss) -14,545 52,649 -67,194 Net profit margin -1% 4% -5pp

During the period covered by this report, significant increases in the prices of natural gas, the key feedstock, were recorded. Fluctuations in gas prices are estimated to increase operating expenses by over PLN 46,000 thousand compared with the scenario of average gas prices unchanged year on year. At the same time, an unfavourable downward trend of ammonia market prices was recorded. Delayed application of fertilizers (due to the prolonged winter and low temperatures, which delayed agricultural work) also had a negative impact on revenue and profit figures. The dates of payment of the outstanding part of direct subsidies to farmers were postponed, adversely affecting the financial position of farms. Moreover, due to significant volumes of fertilizers purchased in earlier months, demand for fertilizers fell in the first quarter of 2018. Q2 2018 did not bring a considerable improvement in agricultural conditions as a drought was followed by heavy rainfalls, which made agrotechnical work difficult. Despite market headwinds, the Group’s liquidity ratios remained at comfortable levels. Operational optimisation efforts helped reduce the Group’s administrative expenses by almost 4% year on year.

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2.3.2. Segments’ financial results In H1 2018, the Fertilizers Segment’s EBIT was negative, mainly attributable to adverse factors in the Company’s market environment. On the other hand, successful trading efforts helped make the most of the continuing strong conditions on the titanium white market, bringing about a 65% increase in the Pigments Segment’s EBIT relative to H1 2017. Table 5. EBIT by segment in H1 2018 Other Item Fertilizers Pigments Polymers Activities Revenue from external sales 1,002,532 218,542 25 24,223 Share [%] 80% 18% 0% 2% EBIT -15,171 56,147 -5,244 1,204

FERTILIZERS In H1 2018, the Fertilizers Segment’s revenue was PLN 1,002,532 thousand, accounting for 80% of the Group’s total revenue. The segment’s EBIT was negative at PLN -15,171 thousand. On average, domestic fertilizer sales accounted for 62% of the segment’s total sales. In the reporting period, compound fertilizers accounted for the highest share in the Parent’s revenue by product group, representing over 52% of total revenue. The Fertilizers Segment’s EBIT was largely affected by unfavourable conditions on the nitrogen fertilizers market. A sharp increase in the prices of the key feedstock, i.e. natural gas (by 20% year on year on average in H1 2018, and by as much as 45% in June 2018 relative to June 2017), was accompanied by a significant decline in the market prices of ammonia, persisting from January to late April, with a slight improvement as from the beginning of May. These developments had a doubly adverse effect on the unit margin (as higher variable costs of ammonia production were combined with a simultaneous drop in the selling price of the product), while reducing the segment’s ability to export ammonia relative to the corresponding period of the previous year. Between December 2017 and June 2018, the average monthly price movements were equally important: the price of gas rose by 6% in the period, while the selling price of ammonia fell by as much as 24%. Figure 5. Ammonia and gas prices [USD/t and EUR/MWh]

28 Gas +6% 550 23 450 18 Ammonia 350 -24% 13 250

8 150

Jul… Jul… Jul…

Apr… Apr… Apr… Apr…

Jan… Jan… Jan… Jan…

Oct… Oct… Oct…

Jun… Jun… Jun… Jun…

Sep… Sep… Sep…

Mar… Mar… Mar… Mar…

Feb… Feb… Feb… Feb…

Aug… Aug… Aug…

Dec… Dec… Dec…

Nov… Nov… Nov…

May… May… May… May…

In the first half of 2017, the Fertilizers Segment’s performance was less adversely affected by higher prices of coal and potassium chloride (up by 32% and 7%, respectively). At the same time, a significant increase was recorded in the prices of CO2 emission allowances, pushing up production costs of the segment’s core products. The delayed application of fertilizers (due to severe weather conditions) and the stocks of fertilizers for spring application built up by customers in the previous year adversely affected the sales of phosphate fertilizers. Overall, the Fertilizers Segment’s revenue in H1 2018 went down 12% year on year. Revenue from sales of compound fertilizers amounted to PLN 649,747 thousand in H1 2018, having decreased 13% year on year. The main cause of the decrease was a lower (by more than 81 thousand tonnes) sales volume of compound fertilizers.

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Revenue from sales of urea amounted to PLN 186,075 thousand, down by 3% on H1 2017, chiefly on a decline (by nearly 6%) in the average selling price of urea. At the same time, sales volumes in this category of fertilizers rose by 3%. Revenue from sales of ammonia fell by 38% year on year, mainly as a result of a decrease in ammonia sales volumes (down 35%). In addition, the average selling price of ammonia went down 5%. Figure 6. Revenue of the Fertilizers Segment -12% 800 000 1 200 700 000 1 000 600 000 500 000 800 400 000 600 300 000 400 200 000 100 000 200

0 0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1H 1H 2017 2018 2013 2014 2015 2016 2017 2018

PIGMENTS Trading activities in H1 2018 were supported by stable, favourable conditions in the Pigments Segment’s market, which led to a strong year-on-year increase in revenue and profits. In the reporting period, the Pigments Segment’s revenue came to PLN 218,542 thousand, accounting for 18% of the Company’s total revenue. Year on year, the segment’s revenue went up by 17%, which was mainly attributable to a 28% increase in the average selling price of titanium white. The higher price was driven by continued undersupply of, and sustained demand for, titanium white in Europe. Approximately 61% of the segment’s revenue was derived from sales on foreign markets. Figure 7. Revenue of the Pigments Segment +17%

120 000 250 100 000 200 80 000 150 60 000 40 000 100 20 000 50

0

2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 1Q 0 1H 1H 2017 2018 2013 2014 2015 2016 2017 2018

The sales of titanium white were 8% below the level recorded in the very good first half of 2017, but above the average for the last ten years, with the Company’s production capacity utilised almost in full. The segment posted strong EBIT, at PLN 56,147 thousand, up 65% year on year.

POLYMERS In H1 2018, the share of the subsidiary PDH Polska S.A.’s assets in total assets of the Group’s all segments exceeded 10%. Therefore, a condition was met for identifying a separate reporting segment, i.e. one of the quantitative thresholds specified in IFRS 8 was exceeded. By the Parent Management Board’s decision, PDH Polska S.A. was separated from other activities and is currently presented under a newly identified reporting segment, namely the Polymers Segment. OTHER ACTIVITIES Revenue recognised under ‘Other Activities’ accounts for approximately 2% of the Group’s total sales. Other Activities reported a net profit of PLN 1,204 thousand.

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2.3.3. Operating expenses The Group’s operating expenses amounted to PLN 1,201,403 thousand in H1 2018, having decreased by PLN 48,501 thousand (or 4%) year on year. The decrease was reported mainly in raw materials and consumables used (which represent almost 70% of total expenses). In H1 2018, March saw a sharp rise in gas prices. Its average price went up by 22% relative to January and 20% year on year. The prices of fine coal and potassium chloride increased by 32% and 7%, respectively, whereas the prices of other strategic raw materials rose to a lesser extent or remained relatively flat on H1 2017. Despite higher prices of several key raw materials, total operating expenses, including mainly cost of raw materials and consumables used, were lower than in H1 2017, driven by lower production volumes resulting in lower consumption of key raw materials. There was also a drop in phosphate rock prices. The completion of several investment projects and major overhaul works resulted in higher depreciation charges. Wages and salaries, including surcharges, increased year on year, chiefly due to the execution of collective pay agreements. The decrease in services related mainly to the reclassification of marketing packages, which were disclosed under selling and distribution expenses in 2017 and in H1 2018 they decreased revenue. Taxes and charges increased mainly on the higher cost of CO2 emission allowances, related to a significant increase in their prices. Under other expenses, costs of advertising and insurance declined materially. In H1 2018, the Group’s total administrative expenses fell by 4% year on year, of which the Parent’s expenses went down by 3%. Table 6. Costs by nature of expense Item H1 2018 H1 2017 change % change Amortisation and depreciation 56,594 50,128 6,466 13 Raw materials and consumables used 811,030 868,693 -57,663 -7 Services 75,284 85,414 -10,130 -12 Wages and salaries, including surcharges, 179,143 163,725 15,418 9 and other benefits Taxes and charges 61,097 54,176 6,921 13 Other expenses by nature 18,255 27,768 -9,513 -34 Total 1,201,403 1,249,904 -48,501 -4

2.3.4. Structure of assets, equity and liabilities In H1 2018, the Group’s assets rose to PLN 2,252,710 thousand, by PLN 131,703 thousand, on the end of H1 2017. As at June 30th 2018, non-current assets amounted to PLN 1,545,297 thousand, and current assets – to PLN 707,413 thousand. Year on year, the most significant movements in assets in H1 2018 included:  a 4% (PLN 53,912 thousand) increase in property, plant and equipment, attributable to the completion of new investment projects,  a 22% (PLN 45,760 thousand) increase in trade and other receivables, mainly due to an increase in the Parent’s trade receivables,  a 25% (PLN 27,077 thousand) decrease in cash and cash equivalents in bank accounts,

 a PLN 8,250 thousand increase in property rights due to the higher amount of CO2 emission rights at the Parent,  called-up share capital not paid in the amount of PLN 70,500 thousand, payable to PDH Polska S.A. in connection with the ongoing process of share capital increase at the subsidiary. Table 7. Structure of assets Item H1 2018 H1 2017 change % change Non-current assets, including: 1,545,297 1,507,252 38,045 3 Property, plant and equipment 1,416,900 1,362,988 53,912 4 Perpetual usufruct of land 6,586 6,790 -204 -3 Investment property 5,381 5,323 58 1

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Item H1 2018 H1 2017 change % change Intangible assets 49,911 68,370 -18,459 -27 Equity-accounted investees 20,773 20,501 272 1 Other receivables 10,291 1,923 8,368 435 Deferred tax assets 35,455 41,357 -5,902 -14 Current assets, including: 707,413 613,755 93,658 15 Inventories 255,923 263,123 -7,200 -3 Property rights 35,449 27,199 8,250 30 Derivative financial instruments 0 403 -403 -100 Current tax assets 3,859 0 3,859 - Called-up share capital not paid 70,500 0 70,500 - Trade and other receivables 251,772 206,012 45,760 22 Cash and cash equivalents 82,129 109,206 -27,077 -25 Non-current assets held for sale 7,477 7,812 -335 -4 Total assets 2,252,710 2,121,007 131,703 6

Table 8. Structure of equity and liabilities Item H1 2018 H1 2017 change % change Equity 1,217,837 1,134,032 83,805 7 Non-current liabilities, including: 458,756 446,693 12,063 3 Borrowings 288,018 312,350 -24,332 -8 Other financial liabilities 6,886 4,875 2,011 41 Employee benefit obligations 69,265 63,506 5,759 9 Other liabilities 3,453 107 3,346 3,127 Provisions 65,956 49,491 16,465 33 Grants 25,136 16,364 8,772 54 Deferred tax liability 42 0 42 - Current liabilities, including: 576,117 540,282 35,835 7 Borrowings 64,653 109,707 -45,054 -41 Other financial liabilities 1,324 3,669 -2,345 -64 Employee benefit obligations 8,655 9,081 -426 -5 Current tax liabilities 3 2,539 -2,536 -100 Trade and other payables 481,945 399,635 82,310 21 Provisions 4,814 2,831 1,983 70 Grants 14,470 12,591 1,879 15 Liabilities directly related to assets held for 253 229 24 10 sale Total liabilities 1,034,873 986,975 47,898 5 Total equity and liabilities 2,252,710 2,121,007 131,703 6

The most significant year-on-year changes in equity and liabilities in the reporting period included:  a 7% (PLN 83,805 thousand) increase in the Group’s equity, mainly due to the allocation of PLN 93,456 thousand from the Parent’s 2017 net profit to statutory reserve funds, with a simultaneous decline (by PLN 114,753 thousand) in the Group’s net profit for the period, and a PLN 127,492 thousand increase in non-controlling interests following the share capital increase at PDH Polska S.A., with a concurrent increase in the non-controlling interests’ percentage share in that company’s share capital, and with the loss of control over the subsidiary African Investment Group S.A.;  a significant (7% or PLN 35,835 thousand) year-on-year increase in current liabilities, resulting primarily from higher trade payables (up PLN 82,310 thousand), despite lower liabilities under borrowings (down PLN 45,054 thousand);

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 a slight (3% or PLN 12,063 thousand) year-on-year increase in non-current liabilities, including a PLN 16,465 thousand increase in provisions (recognition of environmental provisions), and a PLN 24,332 thousand decrease in liabilities under borrowings.

2.3.5. Financial ratios Profitability The Group reported a net loss following the loss of control over the subsidiary AFRIG S.A. Accordingly, the Group’s profitability ratios, calculated by reference to net profit, were also negative. As disclosed in the separate financial statements, the Company’s net profit margin was 4% despite a challenging market environment in the first half of 2018. Compared with the corresponding period of the previous year, the operating profit margin reflected the Company’s weaker performance, which was largely an effect of adverse market conditions, particularly in the case of nitrogen fertilizers (where a significant increase in the prices of the key raw material, i.e. natural gas, was coupled with lower market prices of ammonia).

Table 9. Profitability ratios Ratio H1 2018 H1 2017 Gross profit margin 14% 20% EBIT margin 3% 9% EBITDA margin 8% 13% Net profit margin -1% 7% ROA -1% 5% ROCE 2% 8% ROE -1% 9% Return on non-current assets -1% 7%

Ratio formulas: Gross profit margin = gross profit (loss) / revenue (statement of comprehensive income by function) 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 / (total assets less current liabilities) Return on equity (ROE) = net profit (loss) / equity Return on non-current assets = net profit (loss) / non-current assets

Liquidity In the reporting period, the Group’s liquidity ratios, despite its weaker performance, remained at levels ensuring financial security. Table 10. Liquidity ratios Consolidated Ratio H1 2018 H1 2017 Current ratio 1.2 1.1 Quick ratio 0.8 0.6 Cash ratio 0.1 0.2

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.

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Operating efficiency Year on year, the average payment period was much longer due to increases in trade payables. The average collection period was also significantly longer, affected by a 22% increase in trade receivables. The increase in the current asset turnover ratio was offset by the lengthening of the average payment period. As a result, the cash conversion cycle shortened by six days.

Table 11. Operating efficiency ratios Ratio H1 2018 H1 2017 Inventory turnover 43 44 Average collection period 36 27 Average payment period 81 67 Cash conversion cycle -2 4

Ratio formulas: Inventory turnover in days = (inventory * 180) / cost of sales Average collection period in days = (trade and other receivables * 180) / revenue Average payment period in days = (trade and other payables * 180) / cost of sales Cash conversion cycle = inventory turnover in days + average collection period in days - average payment period in days Debt In H1 2018, the total debt ratio as well as the long- and short-term debt ratios remained relatively unchanged year on year. In H1 2018, the Group’s debt ratios were safe. Table 12. Debt ratios Ratio H1 2018 H1 2017 Total debt ratio 46% 47% Long-term debt ratio 20% 21% Short-term debt ratio 26% 25% Equity-to-debt ratio 118% 115% Interest cover ratio -99% 2,012%

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

2.4. Financial liquidity In the reporting period, the financial results of the Group were closely correlated with the market environment. This correlation, still observed and confirmed on the market, remains beyond the Company’s direct influence or control. 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 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.

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To secure financial liquidity, the Company uses external sources of financing. Loans are repaid using current cash flows, but the Company always maintains a safe level of credit reserve for use when necessary. In the first half of 2018, there were no events of default, whether related to timely payment of liabilities or other covenants, which could result in debt acceleration. In the opinion of its strategic lenders, the Company has a sound liquidity position and high credit standing. Accordingly, even with a potential economic slowdown, the risk that it might lose liquidity remains low. Moreover, additional financing for the Company’s short- and long-term corporate needs became available following the execution of an agreement for intra-group financing between Grupa Azoty S.A., Grupa Azoty Zakłady Azotowe Puławy S.A. and Grupa Azoty Zakłady Azotowe Kędzierzyn S.A.

2.5. Borrowings Under the consolidated financing model implemented at the Grupa Azoty Group, the Company uses a harmonised package of corporate financing instruments, ensuring long-term financial security. The Company’s bilateral agreements are also consistent with this package. The Company has the ability to significantly increase its financial debt when and as needed to finance new projects. Table 13. The Group’s liabilities under bank loans as at June 30th 2018* Bank / Amount Utilisation Available Limit Currency Type of liability drawn (%) amount PKO BP S.A. Multi-purpose credit facility limit 62,000 13,164 PLN 21 48,836

PKO BP S.A. 208,900 63,597 PLN 30 145,303 Overdraft facility BGK S.A. 80,000 0 PLN 0 80,000 Overdraft facility BGŻ BNP Paribas S.A. multi- 22,000 20,079 EUR 91 0 purpose credit facility

* In nominal terms. The Parent also uses a multi-purpose credit facility of PLN 62,000 thousand under an agreement with PKO BP S.A. On June 29th 2018, an annex was signed extending the term of the agreement until September 30th 2022. As at June 30th 2018, no amount was outstanding under the working capital facility, while PLN 13,164 thousand of the facility limit was drawn as guarantees and a stand-by letter of credit. The remaining amount, of PLN 48,836 thousand, remains available to be used for further guarantees, letters of credit and as a working capital facility. The Parent and its subsidiaries use an overdraft facility under an agreement between Grupa Azoty S.A. and PKO BP S.A., supported by an additional physical cash pooling service. On June 29th 2018, an annex was signed extending the term of the facility agreement until September 30th 2022. The available limit is PLN 208,900 thousand. The limit available to the Parent is PLN 200,500 thousand and consists of a credit limit (PLN 110,500 thousand) and daily limit available as part of physical cash pooling (PLN 90,000 thousand). As at June 30th 2018, the amount of the Parent’s debt outstanding under the agreement was PLN 62,103 thousand. Within the same credit facility, the following limits are available to subsidiaries: • Grupa Azoty POLICE Serwis Sp. z o.o. PLN 8,000 thousand, • Koncept Sp. z o.o. PLN 200 thousand, • Transtech Sp. z o.o. PLN 100 thousand, • Zarząd Morskiego Portu Police Sp. z o.o. PLN 100 thousand. As at June 30th 2018, only Grupa Azoty Police Serwis Sp. z o.o. had overdraft debt outstanding at PKO BP S.A., of PLN 1,494 thousand. On January 25th 2017, the Parent executed a PLN 80,000 thousand overdraft facility agreement with Bank Gospodarstwa Krajowego. The agreement was entered into for a period of 36 months. As at June 30th 2018, no debt was outstanding under the agreement. On February 18th 2014, the Company and the subsidiary African Investment Group S.A. entered into a multi-purpose credit facility agreement with BGŻ BNP Paribas Bank Polska S.A. Under the

Page 20 of 43 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the Group’s operations in H1 2018 (all amounts in PLN '000 unless indicated otherwise) agreement, as amended, the Bank advanced a EUR 22,000 thousand revolving facility to finance the subsidiary’s operations. Pursuant to the agreement, the financing matures on February 18th 2024. As at June 30th 2018, EUR 20,079 thousand was drawn under the facility. Table 14. The Group’s liabilities under borrowings from related parties as at June 30th 2018* Related party / Curren Available Amount Amount drawn Utilisation (%) Type of liability cy amount

Grupa Azoty S.A. 104,000 18,000 PLN 75 26,000 Investment loan

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

The Company uses a loan to finance its capital expenditure, advanced by Grupa Azoty S.A. under the intragroup financing agreement of April 23rd 2015. The PLN 104,000 thousand loan was advanced on September 14th 2015. The Parent drew PLN 78,000 thousand under the loan. As at June 30th 2018, the amount outstanding under the loan was PLN 18,000 thousand. On September 14th 2015, Grupa Azoty S.A. advanced to the Company a PLN 60,000 thousand loan, under the intragroup financing agreement of April 23rd 2015, to finance the share capital of the new subsidiary PDH Polska Spółka Akcyjna. In H1 2018, Grupa Azoty S.A. disbursed the last tranche of PLN 40,000 thousand. As at June 30th 2018, the amount outstanding under the loan was PLN 60,000 thousand. Table 15. The Group’s liabilities under non-bank borrowings as at June 30th 2018* Co-financing institution / Curren Utilisation Amount Amount drawn Project cy % Regional Fund for Environmental Protection and Water Management in Szczecin 90,000 50,625 PLN 100 Exhaust gas treatment unit and upgrade of EC II CHP plant

National Fund for Environmental Protection and Water Management in 90,000 73,925 PLN 100 Szczecin Upgrade of ammonia synthesis process * In nominal terms.

The Parent has a 10-year PLN 90,000 thousand loan from the Regional Fund for Environmental Protection and Water Management in Szczecin, to finance the ‘Exhaust gas treatment unit and upgrade of the EC II CHP plant at Zakłady Chemiczne Police S.A.’ project. The loan was disbursed in full and is scheduled for repayment by December 31st 2022. As at June 30th 2018, the amount outstanding under the loan was PLN 50,625 thousand. A 10-year PLN 90,000 thousand loan from the Regional Fund for Environmental Protection and Water Management in Warsaw to finance the ‘Upgrade of ammonia synthesis process at Zakłady Chemiczne Police S.A.’ project. The loan was disbursed in full. The loan agreement expires on March 31st 2024. As at June 30th 2018, the amount outstanding under the loan was PLN 73,925 thousand. Borrowing agreements concluded or terminated during the reporting period In the first half of 2018, the Parent neither concluded nor terminated any borrowing agreements.

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2.6. Key projects In H1 2018, the Group’s expenditure on property, plant and equipment and intangible assets was PLN 84,966 thousand. The Parent’s expenditure on property, plant and equipment and intangible assets was PLN 57,124 thousand, including: • growth capex PLN 17,030 thousand; • mandatory capex PLN 16,555 thousand; • maintenance capex PLN 8,759 thousand; • purchase of finished goods PLN 1,920 thousand; • major overhaul work and other expenditure PLN 12,860 thousand.

Additionally, in the period covered by this report, capital expenditure of the subsidiary PDH Polska S.A. on property, plant and equipment and intangible assets was PLN 27,568 thousand. Figure 8. The Company’s capital expenditure structure as at June 30th 2018

4%

20% growth capex 39% Mandatory capex Business maintenance capex Purchase of finished goods 37%

THE GROUP’S KEY INVESTMENT PROJECT – POLICE POLYMERS In H1 2018, work was under way on ‘Police Polymers’, the Group’s key investment project including the construction of propylene and polypropylene units with auxiliary facilities and infrastructure, as well as a port terminal with feedstock storage facilities. Police Polymers is scheduled to break ground in late 2019, while its completion is expected in late 2022. It has been assumed that fifty per cent of the ‘Police Polymers’ costs will be financed with senior debt and the balance – with subordinated capital, including equity. On January 11th 2018, PDH Polska S.A. and Grace Technologies, Inc. executed an agreement to purchase a licence for the polypropylene production technology and a contract for the supply of catalysts. Over the last decade, Grace’s Unipol technology has gained a competitive edge, becoming the most commonly used technology for polypropylene manufacturing. Its popularity follows from the limited number of unit operations and processes, while the use of advanced catalysts ensures excellent properties of the polypropylene product types. In addition to the full range of standard polypropylene types, the Unipol technology supports the production of its speciality varieties, including random and block copolymers. Thus the company has reached another milestone having already secured technology licences essential for the project: apart from Grace’s licence, also a licence for the UOP Oleflex catalytic dehydrogenation process. In the first half of 2018, technical work performed on the project included preparation of engineering documentation, particularly front-end engineering designs (FEEDs) for the polypropylene unit and auxiliary facilities, as well as a conceptual design of the polypropylene logistics infrastructure. The documentation was delivered to potential bidders for the role of the project’s General Contractor on a turn-key (EPC) basis, as a supplement to the invitation to tender issued in January 2018. As part of the tender procedure, an intensive dialogue was held concerning technical and legal aspects of the EPC contract. Concurrently, steps were taken to raise financing for the project. The related work focused on preparing key parts of the information pack for financial institutions, based on which the company would invite the submission of project funding proposals from the financial market. Processes were launched to select advisors who would assist financial institutions in the assessment of the project’s concept and documentation, including its market, technical and legal aspects. Certain advisors have already been selected, while the selection process for the others is well advanced.

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In the reporting period, commercial negotiations were also held to agree initial terms of business with polypropylene distributors and meetings were continued with polypropylene processors based in Poland and abroad. Negotiations were also held to agree the initial commercial terms of the supplies of strategic raw materials. As the project had been extended in Q4 2017 to include a polypropylene unit, work has been under way, and is now nearing completion, to prepare a new environmental impact report, which is required to obtain an environmental permit for the ‘Police Polymers’ project. PARENT’S KEY PROJECTS The Company launched 19 new projects with a total capex budget of PLN 41,749 thousand. In H1 2018, the Company continued 51 projects commenced in previous years, with a total expenditure planned to be spent in 2018 of PLN 112,303 thousand. The most important of these projects are presented and described below. Exhaust gas treatment unit and upgrade of the EC II CHP plant The objective of the project is to bring the operation of the CHP plant in line with the requirements of Directive 2010/75/EU. In Q1 2018, commissioning and operational optimisation work was carried out. In May 2018, the unit was placed in service. Budget: PLN 290,885 thousand Change of the DA-HF phosphoric acid production technology The key objective of the project is to improve the efficiency of phosphoric acid production and the acid’s quality by reducing impurities and waste generation. The new technology will be based on a licence from Pray on Technologies S.A. The project was divided into two stages. The first stage, covering work that can be performed while the unit remains in operation, was completed. The second stage, covering work inside the production building and requiring a shutdown of the unit, will be executed under a contract signed with GA Police Serwis S.A. The unit has been shut down since May 2018. The existing installations (wiring and piping) and process equipment were disassembled and demolition work was carried out. Prefabrication of pipelines, a scrubber tank and conversion reactor started, as did the reconstruction of the conveyor bridge, construction work on facilities 136 and 137, and work related to DCS installation. Budget: PLN 73,700 thousand, expected completion: 2018. Upgrade of TUP-12 (TG1) turbine generator set and auxiliary equipment The objective of the project is to improve the reliability, safety, flexibility and quality of the turbine control systems across the operating range. In Q1 2018, equipment commissioning and tests were carried out on the turbine generator set. The upgraded unit achieved the target operating parameters and was placed in service. The project was completed. Budget: PLN 16,000 thousand Replacement of 17/18E601A and 17/18E601B heat exchangers When implemented, the project will improve the technical condition of the equipment, increasing its reliability and performance, which will contribute to its operational stability. E601 heat exchangers were already manufactured, and pressure tests were carried out. Currently, preparations are under way to replace a heat exchanger on one of the two ammonia production lines during its yearly shutdown. The assembly of an exchanger on the second line is scheduled for the next year’s shutdown. Budget: PLN 15,500 thousand, expected completion: 2019. WA II tower replacement on Line 7 The replacement of the absorption tower is aimed at maintaining the continuity of operation of the sulfuric acid and steam production plant, while preventing a failure which might result in environmental contamination (leakage of sulfuric acid into the soil). An execution method for the project was selected, and a tender procedure is currently under way to select the contractor. Budget: PLN 14,000 thousand; expected completion: 2019. Replacement of the 311 X PN-2 fertilizer drying unit A new drying unit will guarantee an uninterrupted fertilizer drying process.

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In January 2018, the complete pre-commissioning and commissioning of the drying unit were run. The project was completed; the drying unit was placed in service. Budget: PLN 12,000 thousand Computerisation of the I&C and electrical systems of the NPF Department of the PF-4 crude acid unit As the industrial processes are fully automated, it will be possible to deploy an advanced production process control system. The upgrades will enable in particular precise dispensing of raw materials and utilities, continuous tracking and analysis of trends. The project is being implemented in parallel with the change of the DA-HF phosphoric acid production technology – under the same contract. Budget: PLN 10,846 thousand; expected completion: 2018.

2.7. Factors which will affect the Group’s results over at least the next reporting period Exchange rates Until mid-April, the złoty exchange rate against the euro remained relatively strong, oscillating within the range of 4.13–4.24. In mid-April, the Polish currency started to depreciate. As a result, the EUR/PLN exchange rate at the end of H1 2018 went up to EUR 1 = PLN 4.3750. In Q3, the Polish złoty is expected to remain affected by opposing factors. On the one hand, the Monetary Policy Council’s dovish approach, which has persisted for quite some time, will be conducive to a depreciation of the Polish currency, but on the other hand the PLN exchange rate will be stabilised by upward revisions of the GDP growth forecasts for 2018. Statistically, the złoty always appreciates in summer. Unless there are external supply shocks, the Company expects the EUR/PLN exchange rate to range from 4.25 to 4.35. With regard to the USD/PLN exchange rate, the złoty is expected to slightly weaken against the US dollar, mainly on an anticipated trend of the US currency’s further gradual appreciation against the euro. The high probability of two more increases in the cost of money in the US by the end of 2018, and the Fed continuing its hawkish approach to monetary policy, should help sustain an appreciation of the US dollar against the euro. Accordingly, the złoty exchange rate against the US dollar is expected to range between 3.65–3.80 in the next quarter. The Company uses natural hedging and EUR/USD spot contracts to balance its currency position. Therefore, the forecast currency trends should not have material bearing on the Company’s results in the second half of 2018. Interest rates in Poland In H1 2018, the Monetary Policy Council did not change its policy. The National Bank of Poland continues to advocate a dovish approach to the monetary policy. As may be inferred from regular messages sent to the market, most members of the Monetary Policy Council do not expect any changes in interest rates until the end of this and the next year, which means that the Company’s borrowing costs will remain at a stable level during the year. Prices of raw materials and products in the next period PRODUCTS Ammonia Production constraints at key exporters caused by maintenance shutdowns, a failure of a plant in Indonesia, a scheduled overhaul of the Togliatti-Odessa ammonia pipeline, and procurement plans announced in India should help keep the uptrend in ammonia prices, commenced in Q2 2018. In line with expectations, ammonia prices were on the rise in July and the first half of August. Ameropa reports that it distributed all of its ammonia in August and September. The maintenance shutdown at Rossosh will most likely begin in September. Attractive prices of ammonia in Ukraine may mean that some volumes of Russian ammonia transported via the port of Yuzhny may be sold on the local Ukrainian market. The above factors should support the upward trend in ammonia prices in the Black Sea region until the end of the third quarter. Urea Despite contrary pressures, the price of urea should trend upwards into Q3 2018, supported by the geopolitical situation relating to sanctions imposed on Iran, which maximised exports of the region’s

Page 24 of 43 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the Group’s operations in H1 2018 (all amounts in PLN '000 unless indicated otherwise) cheapest urea. However, the market has already begun to shy away from Iran, which may lead to limitations in the supply of the Iranian product. As usual, the volumes of urea purchased as part of tenders announced by the Indian government, rescheduled from Q2, will be a major factor behind the price of urea. China is planning to sell urea abroad, but – given its environmental requirements – the volume of Chinese exports should not cause any market shocks. Demand for urea in the autumn may be unbalanced. Developments on the gas and energy markets will also be of key relevance to urea prices and margins, especially in Europe. Compound fertilizers In Poland and Europe, the third quarter is typically a period when increased quantities of NPK fertilizers are used for autumn application. Demand for NPK fertilizers is expected to grow in the second half of August and in September. Unfortunately, the spring drought, the most severe in years, and locally heavy rainfalls during the harvest season are bound to undermine farmers’ incomes. At the same time, the relatively low prices of a wide range of agricultural produce may dampen expectations of any growth in the prices of and demand for NPK fertilizers. In global terms, strong demand and imports from India and Brazil are expected to continue. In September, Chinese manufacturers may again cut their output due to environmental inspections carried out in autumn, which will certainly reduce Chinese exports. In consequence, DAP prices should go up in the coming months. Titanium white In Q3 2018, the contract prices of pigments are expected to stabilise and/or drop, by EUR 60/tonne on average. Q4 2018 is likely to see further reductions in the contract prices of titanium white caused by a seasonal downtrend (worse weather and lower demand for paints and coatings used in the construction industry). RAW MATERIALS Phosphate rock No details of any planned price increases in Q3 2018 have yet been announced, but OCP’s direct negotiations with India concerning phosphoric acid supplies indicate that phosphate rock prices are likely to go up both in Q3 and Q4 2018. Efforts are being continued in Morocco to maximise the integration of production locally. For instance, OCP confirmed the launch of a granulation plant at the new JPH-4 fertilizer complex, which is to ultimately achieve a production capacity of 1 million tonnes of DAP/MAP/NP/NPK. The start-up of a sulfuric acid unit with a capacity of 1.4 million tonnes of H2SO4 (100%) is currently under way, while a phosphoric acid unit with an annual capacity of 450 thousand tonnes of P2O5 is to be launched in late June or early July of 2018. The third stage of an investment project carried out by Ma’aden Phosphate of Saudi Arabia is also being launched; when completed, the output of fertilizers, including phosphate and phosphoric acid to be used as feedstock for the company’s own production, will double.

Potassium chloride New projects and capacity additions will not cause any reshuffling among major producers of potassium chloride in the coming years. However, they may intensify competition and thus increase pressure from customers when negotiating more favourable contract terms. Sulfur The next round of US sanctions against Iran following Donald Trump’s decision to withdraw from the nuclear deal may affect sulfur exports from Iranian ports. Sulfur from Iran is mainly bought by China, and so Iranian exports to that country are unlikely to be adversely affected by US sanctions. However, it should be borne in mind that, for instance, Turkmen sulfur is also handled at Iranian ports, which may mean that demand for sulfur from Turkmenistan could decline in the long term. If US sanctions are re-imposed and if they affect the Iranian sulfur market, further developments will depend on the reaction of those European countries which oppose the sanctions. Ilmenite and titanium slag The price of ilmenite was high in H1 2018 and is expected to stabilise in the second half of the year. Over the long term, the price of ilmenite will depend on its availability on the global market. At present, there are no new investments in ilmenite mines, and the continuing difficulties on the

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Chinese market may result in production stoppage in that region. If materialised, these issues may lead to a future shortage of this raw material and drive up its prices. Natural gas Despite seasonally lower demand from households in Q3 2018, gas prices are not likely to decline supported by increased demand related to the need to replenish gas storage facilities across Europe ahead of the heating season. Additionally, anxiety on the oil market caused by oil stocks diminishing every week and uncertainty surrounding oil supplies, spurred by the planned imposition of sanctions against Iran, the crises in Venezuela and Libya, as well as infrastructure failures in Canada, will be putting pressure on other energy resources, including gas.

3. Risks and threats 3.1. Strategic management Risks associated with the planning and execution of strategic projects As drivers of long-term growth, strategic investment projects are among Grupa Azoty’s top priorities. They are mainly focused on developing new products, enhancing the efficiency of existing units, and reducing production costs of key products. In addition, upgrade projects are carried out on existing units to ensure their continuing operation. The planning and execution of strategic projects entail multiple risks as well as opportunities. The main risk is associated with failure to complete investment projects according to initial plans and failure to achieve the expected results. The project preparation phase involves the risk of failure to accurately assess the changing environment. Key projects also carry the risk of selecting unsuitable technologies or units responsible for their execution. In the case of incomplete knowledge at a project’s preparation stage or if unexpected circumstances arise, the Company also risks incurring additional capital expenditure during its execution. Risks may also arise from raising the requirements which must be satisfied by contractors/subcontractors, as this may involve higher contract costs and may result in the lower number of potential contractors holding the desired licences. The success of strategic projects is contingent on many external and internal factors. The main external factors affecting the Company’s growth opportunities and growth rate include macroeconomic factors, market situation, economic environment, and the activities of main competitors. They could adversely affect the Company’s and the Grupa Azoty Group’s ability to develop its business as planned and to deliver its strategic objectives. They, however, remain largely beyond the Company’s control. Amendments to EU directives concerning CE marking as well as amendments made to OHS, environmental, and construction-related legislation and potential amendments to regulations governing the Polish Office of Technical Inspection (UDT) or the Polish Office of Transport Inspection (TDT) involve risk of more stringent requirements being imposed with regard to execution and acceptance of works. At the same time, such amendments provide an opportunity to improve OHS and the quality of projects being delivered. Major internal factors and efforts relevant to the Company’s and the Grupa Azoty Group’s growth include the technical condition of production units and organisational preparedness to deliver the investment programme. In order to minimise the risks to the execution of strategic projects at the Company and the Grupa Azoty Group, internal procedures have been put in place to define and govern the preparation and execution of investment projects. Specific controls are required for contractors, their credentials and experience, as well as proper and timely performance of work. The internal control system helps mitigate any deviations from intended outcomes. The planning phase is based on reliable market information sourced from reports of external market research firms, or opinions of technology, economic and market consultants and advisors. Oversight has been introduced over strategic projects, which involves a review of projects’ key assumptions(business effects, budgets, KPIs, schedules, division of responsibilities). Regular projects status updates are provided, and Project Managers are required to prepare monthly and quarterly progress reports. Such reports also cover the risks and threats related to specific projects. A uniform risk assessment methodology for the planning and execution of strategic projects was introduced across the Grupa Azoty Group. The risk assessment procedure involves two aspects of key importance for the implementation of strategic projects: their

Page 26 of 43 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the Group’s operations in H1 2018 (all amounts in PLN '000 unless indicated otherwise) budgets and completion deadlines. Risk indicators for strategic projects are monitored on a regular basis and reported quarterly. Seven strategic projects were being monitored in H1 2018. As part of the management of risks associated with strategic project planning and execution, a number of steps are planned to reduce the likelihood of such risks materialising. Risk of implementation/tightening of EU or local regulations which would restrict the use of the Company’s products There is a risk that the Company may incur costs arising from more stringent requirements with respect to the content of heavy metals (such as cadmium, nickel) in its products. The Company may find it difficult to meet the stringent limits; or it may, in extreme cases, fail to ensure acceptable quality parameters of its products (compound fertilizers). More stringent regulations concerning heavy metal content in fertilizers may force the Company to find new supply sources for raw materials, including phosphate rock and magnesites, which in turn may lead to increased production costs. To date, no technology for removal of heavy metals (including cadmium from fertilizers) has been developed and commercialised. Laboratory research is carried out and technologies are examined for their feasibility (pilot implementations followed by development of design concepts for selected solutions), which includes evaluation of process effectiveness and assessment of potential capital and operating expenditure requirements of future projects. A transition to fertilizers production processes which would meet the stringent requirements may result in deterioration of product competitiveness and may adversely affect sales due to higher production costs. Like the other Polish manufacturers of phosphate fertilizers and most of the European fertilizer producers, the Grupa Azoty Group proposed that a cadmium (Cd) content limit in fertilizers be set at 80 mg per kilogram of P2O5, which would ensure a reduction of cadmium content in soil, while enabling the industry to avoid significant market consequences. In December 2017, the EU Council adopted a position on the permissible limit of cadmium content in fertilizers (setting it at 60 mg Cd), to be introduced in eight years’ time. While the EU Council’s position is not quite satisfactory to the Company, it nevertheless provides the eight-year transition period for manufacturers to introduce operational and technological adjustments to meet the new requirements. The EU Council having adopted the position, the work on the new Fertilizer Regulation was elevated to the ‘trilogue’ between the European Commission, the European Parliament and the EU Council. In mid-2017, the European Parliament adopted a unfavourable proposal concerning the cadmium content (60 mg Cd per kilogram of P2O5 upon implementation; 40 mg Cd per kilogram of P2O5 after 6 years; 20 mg Cd per kilogram of P2O5 after 16 years). Consequently, a material risk exists that trilateral negotiations will conclude with much stricter limits being imposed. From the Company’s perspective, a long transition period is necessary to take measures which would enable manufacturers to meet the new requirements. The Company actively participates in the legislative work on the draft new Fertilizer Regulation. Support and lobbying activities are continuously coordinated at EU institutions. The Company participates in developing an opinion on the draft legislative documents and in the consultation efforts. It works with other fertilizer manufacturers and industry associations (e.g. within Alliance Européene des Engrais Phosphatés (AEEP) initiated by the Grupa Azoty Group), with a view to developing a stronger common position towards the proposed restrictions. The Company is searching for viable technical and technological alternatives in anticipation of the introduction of pollutant (including cadmium) content limits for fertilizers and is developing technology for removing heavy metals from production streams. It also reviewing its product portfolio in the context of the legislative requirements, taking into account products’ market attractiveness and production costs.

3.2. Management of fixed production assets Risk of major industrial accidents or technical failures resulting in disruption of operations and stoppage of key production units Given the nature of its business, the Company’s priority is to observe the most stringent safety standards to mitigate the risk of industrial accidents. The identified risks that may be key to the Company’s ability to pursue its business objectives are monitored on an ongoing basis. The risk of a potential failure may emerge from: events caused by an improperly conducted production process, faulty technical maintenance, technical condition of production units or incorrect methods of assessing the technical condition (technical condition

Page 27 of 43 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the Group’s operations in H1 2018 (all amounts in PLN '000 unless indicated otherwise) assessment which does not comprehensively addresses specific conditions of manning and operating technical facilities). The risk may also be posed by fortuitous events (hidden defects in materials or technology). On the other hand, an opportunity is provided by broadening the range of diagnostic methods and non-destructive testing, as well as by the introduction of additional measuring tools. The Company is classified as an establishment with a high risk of a major industrial accident (upper- tier establishment — UTE). The Company has developed and introduced mandatory programmes to prevent such accidents, and regularly monitors and implements legal requirements relating to safety, including the requirements of the Seveso III Directive transposed into Polish legislation. The Company has in place technical and organisational measures to prevent industrial accidents and contain their consequences. The well-trained Company Fire Brigade using state-of-art- equipment, with additional support from chemical rescue teams and other services, is capable of undertaking effective rescue operations in any situation. The correctness of work safety solutions in place at the Company is assessed by external inspection authorities and accreditation/certification bodies. The Company’s due care for safety is evidenced by the certificates it holds. Control mechanisms are implemented and used in the form of internal procedures, service contracts, monitoring systems, and protection of devices and units against exceeding the permissible parameter values. Such organisational and technical measures allow the Company to maintain high safety standards and consistently reduce its environmental footprint. The Company’s efforts to improve working conditions, Company-wide work safety campaigns and the free disease prevention programme offered to employees have been recognised by external institutions − for instance, the Company once again received the Gold Card Leader on Safety at Work Award (2017-2018). The Company’s units are equipped with a range of process interlocks and interlocks supervised by the Technical Inspection Office that prevent accidents and ensure operational and equipment safety in the event of disruption of operations. TPL (Total Preventive Maintenance) programmes and modern Preventive Maintenance programmes, supported by the CMMS system and plant maintenance management, significantly enhance the technical condition and reliability of production units, thereby minimising the risk of accidents. Our strategy of industrial accident and technical failure risk management is primarily focused on mitigating the risk of any critical situation occurring, but also provides for the apportionment of its consequences between insurers should any risk materialise. In line with the applied internal procedure, each failure is followed by activities specified in reports prepared by emergency committees or in corrective/preventive action plans. No serious industrial accidents occurred at the Company in H1 2018.

Risk of failure to meet deadlines for required reduction of NO2, SOx and particulate matter emissions The applicable law requires that the Company complies with stricter emission standards for fuel combusting units. The standards apply to sulfur dioxide, nitric oxides and particulate matter emission limits. The IED Directive and the Environmental Protection Law provide for postponing the effective date of the more restrictive emissions standards. One such mechanism is the Transitional National Plan (TNP). The Group’s fuel combustion sources, comprising the EC II CHP plant, have been submitted for inclusion in the TNP. According to the TNP derogatory mechanism for the EC II combustion sources, from January 1st 2016 to June 30th 2020 the applicable emission limits “are calculated for each year as a moving average”. Measures to reduce NO2, SOx and particulate matter emissions are intended to mitigate particular risks or, should they materialise, to minimise their negative consequences. New emission standards for particulate matter are also applicable to the EC I CHP plant. Following the publication in 2017 of the BAT conclusions for large combustion plants (LCPs), which introduce further restrictions and stricter emission standards, the Company, in order to be legally compliant, must take adaptive measures to meet the standards specified in the BAT conclusions. If the requirements are not met, environmental penalties may be imposed on the Company by an external body. On the other hand, action could be taken to obtain a derogation by extending the period of adaptation to the stricter emission limits set in the BAT conclusions for LCPs beyond the statutory 4-year

Page 28 of 43 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the Group’s operations in H1 2018 (all amounts in PLN '000 unless indicated otherwise) deadline. Such a derogation may be granted because the costs of complying with the emission limits are disproportionate to the environmental benefits. To ensure compliance with the regulations, the Company has taken risk management measures including a number of control mechanisms, such as internal procedures, technological and workplace- specific instructions, continuous monitoring of emissions, internal control, training, and execution of projects to adapt process units to the new legal requirements. In order to mitigate the risk of exceeding emissions limits, an exhaust gas treatment unit based on the wet ammonia method was commissioned at the EC II CHP plant. As part of risk management, ongoing monitoring and monthly reports are provided to ensure that the percentage share (monthly/annual) of SO2 emissions in the limits set in the TNP are observed. Risk associated with new legal requirements relating to production processes The changed environmental regulations will require unit operators to adapt their units to the new emission standards and to incur related costs of such adaptation. Possible threats also include: the introduction of new regulatory requirements that are not correlated with investment plans and financing capacities, the risk of a failure to adapt units to the announced BAT conclusions, a failure to meet the permissible emission limits or the risk of legal changes resulting in an increase in environmental fees. The Company holds a valid integrated permit. In connection with the Marshal Office’s review of the permit, related to the announcement of the BAT conclusions for large combustion plants, the Company was called to apply for amendment to the permit. The Company is obliged to apply, by February 16th 2019, for harmonising the permit with European Commission Implementing Decision (EU) 2017/1442 of July 31th 2017 establishing conclusions concerning the best available technologies (BAT) for large combustion plants in accordance with Directive 2010/75/EU of the European Parliament and of the Council (“LCP Conclusions”). The law obliges the Company to ensure full compliance with the requirements of the conclusions by August 2021. Having conducted a preliminary analysis of the possibility of applying for a derogation from the emission limits, the Company will take steps to obtain such derogations. In June 2018, a tender procedure was concluded to select an entity that would review capital expenditure and environmental benefits, and prepare a request for derogations in accordance with the guidelines of the Ministry of Environment. The Company is actively involved in consultations of draft legislation. For example, it submitted comments on draft amendments to the Waste Act concerning the following matters:  loss of the status of by-products,  monitoring of landfill sites,  waste storage time, provision of security with respect to storage site claims, etc. In its position, the Company drew attention to high costs, unjustified in its case, of the proposed video monitoring of landfill sites and problems posed by the loss of the by-product status by such waste as iron (II) sulfate (a customer’s failure to secure a new permit within the prescribed time may prevent sales to that customer).

3.3. Comprehensive customer support Risk of higher fertilizers imports The Company’s market position and its competitiveness largely depend on conditions prevailing on the fertilizer market, which need to be closely monitored and require taking legislative as well as lobbying initiatives. Imports of NP and NPK compound fertilizers to Poland (mainly from the East) have been growing in recent years. This situation has not caused any reduction of the Company’s output so far, but it poses a threat to fertilizers’ logistics. There is a risk of further growth of imports and oversupply of products on the market. Access to cheap gas and no obligation to comply with the EU environmental regulations and standards give an additional advantage to fertilizer manufacturers from the East. The Company would benefit from the introduction of legal and customs regulations applicable to imported fertilizers, which would ensure fair market competition. Stricter procedures for admission of imported fertilizers to trading on the market would also be welcome. Development of speciality fertilizer formulations, expanding the product range to include products targeted at the most demanding customer groups might provide another opportunity for the Company.

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Measures taken by the Company to strengthen its competitive advantages in the fertilizers segment:  implementation of the Group’s updated distribution strategy,  implementation of projects designed to improve the efficiency of production processes,  strengthening the Group’s market position through acquisitions and placement of new products in the market,  taking active part in the consolidation of the chemical industry,  initiating anti-dumping proceedings,  active participation in the work of Fertilizers Europe,  cooperation with universities and research institutes,  performing laboratory tests to develop coated as well as organic and mineral fertilizers,  supporting agricultural producers by providing them with access to state-of-the-art fertilizing and production solutions.  offering comprehensive agrotechnical consultancy services,  implementing a series of educational programmes devoted to fertilizer application,  conducting regular surveys to gauge farmers’ awareness of fertilizer brands and their purchasing practices. Risk of deteriorated supply-demand balance For years, the Company has been operating in a demanding and changeable competitive environment dependent on business cycles, frequently facing an unfavourable demand-supply relationship, and prices of the fertilizers it manufactures strongly depend on the supply and demand on local and international markets. The market of titanium white is subject to similar patterns. Some of the Company’s competitors may have access to newer technologies or cheaper raw materials, or – thanks to their more favourable geographical location – may have better access to raw materials and target markets. Some manufacturers from the Company’s immediate environment, including Polish manufacturers, plan to increase their production capacities. Because of these factors, the prices of and demand for the Company’s products fluctuate. The risks related to fertilizer production include the following factors:  demand-supply imbalance caused by lower consumption of products (changeable weather conditions, delayed disbursements of direct payments, market saturation and lower volumes of purchases by customers who need to scale down their own output and cope with uncertainties surrounding their ability to sell their own products),  irregular timing of disbursements of direct payments to farmers,  natural disasters, droughts, floods, or frosts leading to lower purchases of fertilizers. The key risks related to titanium white include:  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, There is a potential risk that manufacturers and exporters of titanium white from outside Europe will further increase their activity. However, the continuing demand for pigments enables uninterrupted production and sales on terms better than expected. Sales growth opportunities come from titanium white undersupply attributable to difficulties in resuming production by a Finnish competitor (after a part of its plant had burnt down) and the closing, for environmental reasons, of several smaller plants in China. To consolidate its market position, the Company is seeking to increase sales on both the domestic and export markets by trying to reach new, smaller customers and focusing more on strategic markets. Measures taken by the Company to strengthen its competitive advantages on the fertilizer market include investments and development projects to develop new fertilizer formulas which could be used in agricultural engineering, and to improve the efficiency and flexibility of production processes. The Company is also diversifying its sales markets and customer base. Risk related to customers’ growing quality and environmental requirements Growing customer expectations and the need to comply with the EU environmental regulations and standards have a bearing on the Company’s business. The uncertainty risk relates to:  tightening of EU laws pertaining to heavy metal content, restricting the use of the Company’s products by customers in the EU countries,  restrictions on the quantity of fertilizers used per hectare,

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 introduction/application of restrictions on the quantity of components in products following the amendments to the relevant regulation,  liberalisation of trade in the EU,  meeting fertilizer granulation requirements,  risk of slowing demand from end customers (the cement industry) for iron sulfate in the form offered by the Company as demand for the product in the granular form grows. The Company monitors changes in all types of legal regulations the tightening of which may lead to the limitation of product sales, and coordinates support and lobbying activities at EU institutions. It also works with other manufacturers in order to develop a strong, common position with regard to proposed restrictions. Examples include cooperation with the AEEP (the new fertilizer regulation) or the TDMA (classification of titanium white as a potential carcinogen). Efforts are taken to support fertilizer application. The Company also partners with research and higher education institutions as well as businesses to develop or purchase technologies for removing impurities from phosphoric acid. For years, the Company has been engaged in applied science projects, which result in new or improved products. Risk of loss of business volumes due to the bankruptcy of a key customer The Company consistently implements measures aimed at mitigating the risk of losing key customers, focused on improving product quality and customising its products. In addition to providing application support to key customers, the risk is mitigated by research and development activities which improve the quality of the Company’s product portfolio. Customer satisfaction surveys are also undertaken on an ongoing basis, including comparison of the Company’s products with competitors’ portfolios with respect to specific features, such as: natural price, payment deadlines, contract bonus, discount attractiveness, as well as marketing support, technical advisory and packaging. If the risk materialises, possible threats include the loss of target revenue, as well as difficulties in developing new business relations and finding new markets for the Company’s products. Opportunities include the development of its own distribution network based on operations of the Grupa Azoty Group companies.

3.4. Financial management

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

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

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

 Joint model for managing CO2 emission allowances applicable across the Grupa Azoty Group,  CO2 Emission Allowances Management Policy for the Grupa Azoty Group, In line with the CO2 Emission Allowances Management Policy, the Company has introduced:  CO2 Emission Allowances Procurement Planning Procedure for the Grupa Azoty Group,  CO2 Emission Allowances Procurement Procedure for the Grupa Azoty Group.

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

4. Other information 4.1. Other material events Election of an employee representative on the Management Board Following the end of the term of office of the Management Board member elected by employees, between March 19th and March 22nd 2018 an election was held to select an employee candidate for the Company’s Management Board, as a result of which Ms Anna Tarocińska was re-elected an employee representative.

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Amendments to the Articles of Association Following amendments to the Company’s Articles of Association, the contents of the Rules of Procedure for the General Meeting of Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna of Police had to be adapted to the amended Articles of Association. The new Rules of Procedure were approved by the Company’s Management Board, and on March 29th 2018 they received a positive opinion of the Supervisory Board. The Rules of Procedure came into force upon their approval by the General Meeting, scheduled for May 18th 2018.4

Issues relating to purchase of CO2 emission rights

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

In H1 2018, no CO2 emission allowances were purchased to cover demand in the current accounting year or in subsequent years. Distinction The Company and Grupa Azoty S.A. were named the 2017 “Transparent Company of the Year” in the ranking carried out by the Parkiet magazine and the Institute of Accounting and Taxation jointly with the Warsaw Stock Exchange. It was the second time when companies from the three main stock indices (WIG20, mWIG40 and sWIG80) that communicate best with the market and are the most transparent were distinguished. The ranking was announced on April 25th 2018.

4.2. Significant agreements Significant agreements for supply of raw materials and sale of products On February 6th 2018, the Company and Grupa Azoty S.A. signed a framework agreement for the supply of liquid ammonia to Grupa Azoty S.A. The contract was executed for an indefinite period starting on January 1st 2018 and defines a schedule and other commercial terms of the deliveries. The value of the contract is estimated at PLN 113,000 thousand, VAT-exclusive, per year5. On March 12th 2018, the Company and Polska Grupa Górnicza S.A. signed a bilateral coal supply contract. The contract was executed for an indefinite period starting on January 1st 2018. The value of the contract is estimated at PLN 78,500 thousand, VAT-exclusive, per year6. On April 9th 2018, the Company executed a contract supply of Moroccan phosphate rock with Office Chérifien des Phosphates of Casablanca, Morocco. The contract was concluded for a definite term from January 1st 2018 to December 31st 2020. The value of the deliveries to be made under the contract is estimated at approximately PLN 350,000 thousand.7 Significant financing agreements In connection with the long-term credit facility agreement entered into on January 25th 2018 by and between Grupa Azoty S.A. and the European Investment Bank (“EIB”), a guarantee agreement was concluded between the EIB and the Company together with Grupa Azoty Zakłady Azotowe Puławy S.A. and Grupa Azoty Zakłady Azotowe Kędzierzyn S.A.8 acting as guarantors. The guarantee was provided to EIB as security under the EUR 145,000 thousand credit facility agreement, which is an integral part of Grupa Azoty’s long-term financing package used to fund the Group’s general corporate needs, including strategy implementation and investments, as well as research and development. The maximum amount of the guarantee provided by each of the guarantors, including Grupa Azoty Police, was agreed at EUR 58,000 thousand, i.e. the aggregate amount of the guarantee is EUR 174,000 thousand.

4 For details, see Current Report No. 21/2018 of May 18th 2018 – Draft resolution submitted by shareholder and resolutions passed by Grupa Azoty Police Extraordinary General Meeting on May 18th 2018. 5 For details, see Current Report No. 3/2018 of February 6th 2018 – Execution of framework agreement for ammonia supply. 6 For details, see Current Report No. 5/2018 of March 12th 2018 – Execution of coal purchase contracts. 7 For details, see Current Report No. 11/2018 of April 9th 2017 – Execution of contract for purchase of phosphate rock. 8 For details, see Current Report No. 2/2018 of January 29th 2018 – Provision of guarantee to EIB.

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In connection with the agreement amending and modifying the revolving facility agreement of April 23rd 2015, concluded on June 29th 2018 by and between Grupa Azoty S.A. and Powszechna Kasa Oszczędności Bank Polski S.A., Bank Gospodarstwa Krajowego, Bank Zachodni WBK S.A. and ING Bank Śląski S.A., a facility surety agreement has been concluded between PKO BP S.A. and Grupa Azoty S.A. together with its key subsidiaries, Grupa Azoty Zakłady Chemiczne Police S.A, Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. and Grupa Azoty Zakłady Azotowe Puławy S.A., as surety providers. The maximum amount of the surety provided by each of the surety providers was agreed at PLN 1,200,000 thousand. The surety providers’ liability under the surety agreement is several but not joint. The surety expires with the expiry of the security term, ending on the repayment of debt under the revolving credit facility agreement, concluded for a period of seven years starting from the date of the amending agreement9. On June 29th 2018, the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. together with Grupa Azoty S.A. and key companies of the Grupa Azoty Group, i.e. Grupa Azoty Zakłady Azotowe Puławy S.A. and Grupa Azoty Zakłady Azotowe Kędzierzyn S.A., concluded with Powszechna Kasa Oszczędności Bank Polski S.A. an annex to the following credit facility agreements. The PLN 240,000 thousand multi-purpose credit facility agreement of April 23rd 2015 (“MPCF Agreement”). Under the annex, the availability period of the facility was extended until September 30th 2022 (from September 30th 2019). As at the date of the annex to the MPCF Agreement, the sub-limit available to the Company was agreed at PLN 62,000 thousand. The Company is liable to repay the amounts drawn under the sub- limit made available to it. The Bank’s claims under the MPCF Agreement are secured by sureties in a total amount of PLN 288,000 thousand (120% of the facility amount) granted under a surety agreement executed on June 29th 2018 by each of the Grupa Azoty Group’s key subsidiaries for Grupa Azoty S.A.’s liabilities. The share of each surety provider is not more than one-third (1/3) of 120% of the facility amount, i.e. not more than PLN 96,000 thousand. The PLN 310,000 thousand overdraft facility agreement of October 1st 2010 („Overdraft Agreement”). Under the annex, the availability period of the facility was extended until September 30th 2022 (from September 30th 2019). As at the date of the annex to the Overdraft Agreement, the sub-limit available to the Company was agreed at PLN 110,500 thousand. The Company is liable to repay the amounts drawn under the sub- limit made available to it. The Bank’s claims under the Overdraft Agreement are secured by sureties in a total amount of PLN 372,000 thousand (120% of the facility amount) granted under a surety agreement executed on June 29th 2018 by each of the Grupa Azoty Group’s key subsidiaries for Grupa Azoty S.A.’s liabilities. The share of each surety provider is not more than one-third (1/3) of 120% of the facility amount, i.e. not more than PLN 124,000 thousand. The annexes to the MPCF and Overdraft Agreements form part of the long-term financing package intended to finance general corporate needs and ensure the security of financing for the Parent’s Group companies through an umbrella-type limit allocation, as well as actual intra-group redistribution10.

4.3. Sureties and guarantees The Group provided the sureties and guarantees presented in the table below. Table 16. Sureties provided by the Parent as at June 30th 2018 Type/ Curren Beneficiary Details Date Amount Issuer cy Revolving credit Surety for syndicated Grupa Azoty S.A. facility PLN Jun 29 2018 1,200,000 credit facility agreement Surety for PKO BP Overdraft facility credit facility Grupa Azoty S.A. PLN Jun 29 2018 124,000 agreement (overdraft)

9 For details, see Current Report No. 29/2018 of June 29th 2018 – Grant of surety to credit facility agreement. 10 For details, see Current Report No. 30/2018 of June 29th 2018 – Execution of annexes to credit facility agreements with PKO BP, as subsequently corrected.

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Multi-purpose Surety for PKO BP Grupa Azoty S.A. credit facility PLN Jun 29 2018 96,000 credit facility (MPCF) agreement Guarantee of Credit facility repayment of EIB Grupa Azoty S.A. PLN May 28 2015 220,000 agreement credit facility Guarantee of Credit facility repayment of EBRD Grupa Azoty S.A. PLN May 28 2015 60,000 agreement credit facility Guarantee of Credit facility 58,000 repayment of EIB Grupa Azoty S.A. EUR Jan 25 2018 agreement (252,973 PLN) credit facility 1,952,973

On January 25th 2018, a guarantee agreement was concluded between the European Investment Bank (“EIB”) of Luxembourg and the key subsidiaries of Grupa Azoty S.A., including Grupa Azoty Zakłady Chemiczne Police S.A., Grupa Azoty Zakłady Azotowe Puławy S.A. and Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. The guarantee secures a credit facility agreement. The guarantee was provided as security under a EUR 145,000 thousand credit facility agreement (the “EIB Agreement”) which is an integral part of Grupa Azoty’s long-term financing package used to fund the Group’s general corporate needs, including strategy implementation and investments, as well as research and development. The maximum amount of the guarantee provided by each of the guarantors, including Grupa Azoty Zakłady Chemiczne Police S.A., was agreed at EUR 58,000 thousand, i.e. the aggregate amount of the guarantee is EUR 174,000 thousand. Each guarantor is severally liable for the Borrower’s obligations up to its agreed maximum liability (guarantee amount). If the Borrower fails to satisfy its obligations under the EIB Agreement, the EIB may seek payment of any outstanding amounts by the guarantors. The guarantee expires on the expiry of the security term, ending on the repayment of debt under the EIB Agreement (concluded for a period of ten years starting from disbursement), to be repaid in instalments, starting within three years of the disbursement. The guarantee was provided on arm’s length terms for good consideration. The remaining provisions of the guarantee agreement with the EIB do not differ from standard terms used in agreements of such type. On June 29th 2018, a surety agreement was signed to a revolving credit facility granted by a syndicate of commercial banks to Grupa Azoty S.A., superseding the previous surety agreement of April 23rd 2015. The execution of the new agreement was required due to supplementation of the revolving credit facility agreement, which increases its amount to PLN 3,000,000 thousand and extends its availability period until June 28th 2025. The maximum surety amount for the Company is PLN 1,200,000 thousand. On June 29th 2018, a surety agreement was signed to an overdraft facility agreement with PKO BP S.A., superseding the previous surety agreement of September 20th 2016. The execution of the new agreement was required due to supplementation of the overdraft facility agreement, extending the facility’s availability period until September 30th 2022. The maximum surety amount remained unchanged at PLN 124,000 thousand. On June 29th 2018, a surety agreement was signed to a multi-purpose credit facility agreement with PKO BP S.A., superseding the previous surety agreement of September 20th 2016. The execution of the new agreement was required due to supplementation of the multi-purpose credit facility agreement, extending the facility’s availability period until September 30th 2022. The maximum surety amount remained unchanged at PLN 96,000 thousand. As at June 30th 2018, the subsidiary Grupa Azoty Police Serwis Sp. z o.o. was the only Group company to have provided a surety (to TU INTERRISK S.A.).

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Table 17. Sureties provided by subsidiaries as at June 30th 2018 Type/ Beneficiary Details Currency Date Amount Issuer Agreement for Security for insurance security INTERRISK guarantees provided by PLN Mar 21 2011 1,881 assignment of S.A. INTERRISK S.A. specified items 1,881 In H1 2018, the Parent provided five new guarantees for a total amount of PLN 7,388 thousand Table 18. Guarantees provided by the Parent in H1 2018 Type/ Curren Beneficiary Details Date Amount Issuer cy Guarantor’s obligation as STATE PKO BP S.A. general security in customs PLN Mar 20 2018 1,000 TREASURY transactions GAZ-SYSTEM Payment guarantee for gas PKO BP S.A. PLN Jan 1 2018 391 S.A. fuel transmission contract GAZ-SYSTEM Payment guarantee for gas Feb 28 2018 PKO BP S.A. PLN 3,979 S.A. fuel transmission contract (annex) Performance bond in open Apr 13 2018 PKO BP S.A. PGE S.A. PLN 316 tender contract (annex) STATE TREASURY Performance bond for iron (GIOŚ – Chief PKO BP S.A. sulfate (waste) supply PLN 19.04.2018 1,702 Environmental contract Protection Inspector) 7,388

Table 19. Guarantees provided by the Parent as at June 30th 2018 Type/ Curren Beneficiary Details Date Amount Issuer cy Performance bond in open Apr 13 2018 PKO BP S.A. PGE S.A. PLN 316 tender contract (annex)

Guarantor’s obligation as STATE PKO BP S.A. general security in customs PLN Mar 20 2018 1,000 TREASURY transactions (...)

Payment guarantee for Nov 15 2017 PKO BP S.A. PSE S.A. electricity transmission PLN 1,300 (annex) contract GAZ-SYSTEM Payment guarantee for gas Feb 28 2018 PKO BP S.A. PLN 3,979 S.A. fuel transmission contract (annex) STATE TREASURY Performance bond for iron (GIOŚ – Chief PKO BP S.A. sulfate (waste) supply PLN 19.04.2018 1,702 Environmental contract Protection Inspector) PKO BP S.A. Security for payment of 4,867 MARSULEX contract price (flue gas Dec 28 2017 (standby letter USD (USD 1,300 (MET) treatment unit at EC II CHP (annex) of credit) plant) thousand) 13,164

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As at June 30th 2018, the subsidiary Grupa Azoty Police Serwis Sp. z o.o. was the only Group company to have provided guarantees. Table 20 Guarantees provided by subsidiaries as at June 30th 2018 Type/ Curren Beneficiary Details Date Amount Issuer cy INTERRISK S.A. Performance and defects PGE GiEK S.A. PLN Nov 16 2016 32 insurance guarantee liability bond INTERRISK S.A. PGE GiEK S.A. Defects liability bond PLN Sep 1 2016 4 insurance guarantee Zakład Odzysku i PZU SA insurance Składowania Defects liability bond PLN Sep 5 2017 11 guarantee Odpadów Komunalnych Zakład Odzysku i PZU SA insurance Składowania Defects liability bond PLN Sep 5 2017 2 guarantee Odpadów Komunalnych 49

Guarantee provided after the reporting period In connection with the long-term credit facility agreement concluded on July 26th 2018 (Second EBRD Agreement) between Grupa Azoty S.A. (GA S.A.) and the European Bank for Reconstruction and Development of London (EBRD), for up to PLN 500,000 thousand, a guarantee agreement was concluded between the EBRD and the Key Companies of the Grupa Azoty Group for a total amount of PLN 600,000 thousand. The maximum amount of the guarantee provided by the Company was set at EUR 200,000 thousand, corresponding to one-third of the total amount of the guarantee. Loans advanced to the Group’s related entities The Parent granted the following loans to Supra Agrochemia Sp. z o.o.:  A PLN 3,600 thousand loan to finance the subsidiary’s capital expenditure, advanced on March 14th 2014. As at June 30th 2018, the amount outstanding under the loan was PLN 3,600 thousand. The loan is to be repaid by December 31st 2018.  A PLN 10,000 thousand loan to finance the company’s capital expenditure, advanced on December 31st 2014. In H1 2018, the Parent disbursed the last tranche of PLN 350 thousand. As at June 30th 2018, the amount outstanding under the loan was PLN 10,000 thousand. The loan is to be repaid by December 31st 2018.  A PLN 1,000 thousand loan advanced on June 28th 2018 to secure funds required to complete a share disposal process. In H1 2018, the Parent made no disbursement under the loan agreement and as at June 30th 2018 no debt was outstanding. The loan is to be repaid by December 31st 2018.

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4.4. Shareholding structure Below are listed shareholders holding directly, or indirectly through subsidiaries, at least 5% of total voting rights at the General Meeting as at the date of this report, along with information on the number of shares held by such entities, their respective ownership interests, the number of voting rights held, and their share in total voting rights at the General Meeting. Table 21. Shareholding structure as at June 30th 2018 Number of % of total Number of Ownership voting voting shares interest (%) Shareholder rights rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 12,140,000 16.19 12,140,000 16.19 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other 2,992,678 3.99 2,992,678 3.99 Total 75,000,000 100.00 75,000,000 100.00

According to the list of persons entitled to participate in the Extraordinary General Meeting convened for May 18th 2018, provided to Grupa Azoty Police by the CSDP, on May 10th 2018 OFE PZU Złota Jesień registered 12,140,000 shares in the Company, i.e. the shareholder’s interest in Grupa Azoty Police’s share capital increased from 15.94% to 16.19%.

4.5. Parent shares held by management and supervisory personnel As at the end of the reporting period (June 30th 2018) and as at the date of this report, no members of the Parent’s Supervisory Board held any shares in the Parent. Since the date of issue of the previous report, there have been no changes in holdings of Parent shares by the supervisory personnel. Table 22. Parent shares held by management personnel Number of shares / voting rights As at As at the date As at January 1st 2018 June 30th 2018 of this report Wojciech Wardacki, - - - Ph.D. Tomasz Panas - - - Włodzimierz Zasadzki, - - - Ph.D. Anna Tarocińska 1 1 1

Since the date of issue of the previous report, there have been no changes in holdings of Parent shares by the management personnel.

4.6. Composition of the Management Board and the Supervisory Board Parent’s Management Board As at January 1st 2018, the composition of the Management Board was as follows:  Wojciech Wardacki, Ph.D. – President of the Management Board,  Tomasz Panas −Vice President of the Management Board,  Włodzimierz Zasadzki, Ph.D − Vice President of the Management Board,  Anna Tarocińska − Member of the Management Board (representing Company employees).

On May 30th 2018, following a recruitment procedure, the Company’s Supervisory Board passed resolutions to appoint the Management Board of the 8th joint term of office on the date of the Annual

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General Meeting held to approve Grupa Azoty Zakłady Chemiczne Police S.A.’s financial statements for 2017, i.e. June 4th 201811.

As at the date of this report, the Parent’s Management Board of the 8th term of office was composed of:  Wojciech Wardacki, Ph.D. – President of the Management Board,  Tomasz Panas −Vice President of the Management Board,  Włodzimierz Zasadzki, Ph.D − Vice President of the Management Board,  Anna Tarocińska − Member of the Management Board (representing Company employees). Powers and responsibilities of the Parent’s Management Board In accordance with the Commercial Companies Code and the Articles of Association, the Management Board is the Company’s executive body responsible for managing its affairs and representing it in and out of court. The Management Board, headed by the President, manages the Company and represents it before third parties. All matters connected with the management of the Company’s affairs which are not reserved under the law or the Articles of Association for the General Meeting or the Supervisory Board, fall within the scope of powers and responsibilities of the Management Board. The Management Board operates in compliance with effective laws and is accountable for the management of the Company’s affairs before the Supervisory Board and the General Meeting. Division of powers and responsibilities within the Management Board Pursuant to Supervisory Board’s Resolution No. 26/VI/13 on approval of amendments to the Rules of Procedure for the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A., the division of powers and responsibilities for the supervision of the Company’s individual organisational areas is each time determined and approved by the Company’s Management Board by way of a resolution. As at the date of this report, the division of powers and responsibilities among the Management Board members is governed by:  Management Board Resolution No. 2/VIII/18 of June 11th 2018 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. 1138/VII/18 of May 21st 2018), approved by the Supervisory Board in Resolution No. 217/VII/18 of May 28th 2018. Pursuant to Management Board Resolution No. 2/VIII/18 of June 11th 2018, the supervisory powers and responsibilities are divided among the Company’s Management Board members as follows:  Wojciech Wardacki, Ph.D., President of the Management Board and Chief Executive Officer:  Central Dispatch Division,  Internal Audit Division,  Public Relations Office,  Security Office,  Fertilizer Sales Department,  Corporate Trade Department of the Agro Segment,  Human Resources and Management Department,  Tendering Department,  Fertilizers Business Unit,  Pigments Business Unit,  Włodzimierz Zasadzki, Vice President of the Management Board:  Finance Department,  Strategic Procurement Department,  Strategy and Development Department,  Logistics Centre,  Infrastructure Centre.

11For details, see Current Report No. 25/2018 of May 30th 2018 – Appointment of members of Grupa Azoty Police Management Board of 8th term of office.

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 Tomasz Panas, Vice President of the Management Board:  Nitro Business Unit,  Power Centre.  Anna Tarocińska, Management Board member elected by employees:  Technical Safety Department,  Laboratory Analysis Centre. As regards the division of duties among the Management Board members, the resolution also sets out their powers and responsibilities in the coordination of business processes. The Management Board members supervise and coordinate the following business processes:  Wojciech Wardacki, Ph.D., President of the Management Board and Chief Executive Officer:  Strategic management,  Comprehensive customer support,  Human Resources management.  Włodzimierz Zasadzki, Vice President of the Management Board:  Financial management,  Financial controlling,  Availability of feedstocks and raw materials,  Logistics support,  Production asset management,  Investment project management.  Anna Tarocińska, Management Board member elected by employees:  Technical and environmental safety.

The President of the Management Board, assisted by the unit responsible for providing support to the Company’s governing bodies, performs ongoing supervision of the implementation of resolutions of the Parent’s Management Board, Supervisory Board, and General Meeting. The President of the Management Board, or in his absence the Management Board member designated by the President, convenes Management Board meetings on his/her own initiative, or at the request of a member of the Management or Supervisory Board, sets the agenda and chairs the meetings of the Management Board. In accordance with the Organisational Rules of Grupa Azoty Zakłady Chemiczne Police S.A., President of the Management Board – Chief Executive Officer exercises general supervision of the Company’s operations and is assisted by directors of departments, business units and centres, as well as by managers of other organisational units. Powers and responsibilities of the President of the Management Board - Chief Executive Officer include:  general supervision and coordination of Company’s activities,  promoting a good image of the Company as a corporate citizen,  managing the work of the Company’s Management Board and presiding over its meetings,  performing the Company’s responsibilities as an employer within the bounds of the Polish Labour Code,  supervising the restructuring and privatisation processes at the Company and its subsidiaries,  supervising and coordinating business processes specified in the Management Board Rules of Procedure, and supervising organisational units that report directly to the President of the Management Board – Chief Executive Officer,  approving internal audit, business control and stocktaking plans, as well as making decisions on their implementation, and  representing the Company in and out of court, jointly with another Management Board member or proxy. Supervisory Board In H1 2018, there were no changes in the composition of the Supervisory Board. As at the date of this report, the Parent’s Supervisory Board consisted of: • Joanna Habelman − Chairwoman, • Mirosław Kozłowski − Deputy Chairman, • Bożena Licht − Secretary,

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• Agnieszka Dąbrowska − Member, • Andrzej Malicki − Member (representing Company employees), and • Maria Więcek − Member (representing Company employees).

The Supervisory Board operates on the basis of:  Commercial Companies Code of September 15th 2000 (Dz.U. No. 94, item 1037, as amended),  Act on Commercialisation and Privatisation,  Accounting Act,  Act on Statutory Auditors, Audit Firms, and Public Oversight,  Company’s Articles of Association,  Rules of Procedure for the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. Audit Committee On November 23rd 2009, the Supervisory Board established an Audit Committee (Resolution No. 342/IV/09) to improve the effectiveness of the Board’s work and to strengthen control over the Parent and the Group. The Audit Committee is an advisory body acting collectively within the Supervisory Board. As at January 1st 2018 and as at the date of this report, the Committee members were:  Joanna Habelman − Chairwoman of the Audit Committee,  Agnieszka Dąbrowska – Secretary of the Audit Committee,  Mirosław Kozłowski − Member of the Audit Committee,  Maria Więcek − Member of the Audit Committee. The Audit Committee’s tasks include in particular:  monitoring of:  the financial reporting process,  the effectiveness of internal control and risk management systems as well as internal audit systems in place at the Company, including effectiveness of the financial reporting process,  performance of financial audit, in particular an audit conducted by the audit firm, taking into account all recommendations and findings of the Audit Oversight Commission resulting from audits carried out at the audit firm;  controlling and monitoring of the independence of the qualified auditor and the audit firm, in particular when the audit firm also provides services other than the audit of financial statements;  informing the Supervisory Board of the audit findings and explaining how the audit contributed to the reliability of the Company’s financial reporting and what role the Audit Committee played in the audit;  assessing the auditor’s independence and approving the provision of permitted non-audit services by the auditor;  developing a policy for selecting an audit firm to conduct the audit;  developing a policy for providing permitted non-audit services by the audit firm carrying out the audit, entities related to the audit firm or a member of the audit firm’s network;  establishing an audit firm appointment procedure for the Company;  giving recommendations to the Supervisory Board on the appointment of auditors or auditing firms in line with the procedures referred to in sections e and f.  submitting recommendations to ensure the reliability of the financial reporting process at the Company. Detailed rules of operation of the Audit Committee are set out in the Act of May 11th 2017 on Statutory Auditors, Audit Firms and Public Oversight, as well as in the Rules of Procedure for the Audit Committee approved by Resolution No. 159/VII/17 of the Parent’s Supervisory Board, dated December 28th 2017.

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4.7. Environmental performance The Company constantly monitors its ability to meet any legislated environmental requirements, and actively participates in social consultations of draft legislation. REACH Regulation No 1907/2006 of the European Parliament and of the Council (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, specifying the detailed form of the relevant document (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. It has prepared and published safety data sheets (or equivalent documents) in accordance with the REACH requirements for all marketed products, and keeps updating them as required. The Company also fulfils its obligations as a downstream user of chemical substances. The Parent 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, titanium dioxide (the key component of TYTANPOL pigments) manufactured by the Company was entered in the list of substances to be assessed under the Community Rolling Action Plan (CoRAP). An assessment based on updated registration documents is planned to be made in 2018. Any changes in the classification of substances and mixtures used by the Company are monitored on an ongoing basis. In the case of titanium dioxide, as part of the process to re-evaluate the REACH registration dossier, a classification procedure is pending with respect to a proposal submitted by ANSES and opinion formulated by the Risk Assessment Committee (RAC). A discussion on whether titanium dioxide should be classified as a category 2 carcinogen is being held at the Competent Authorities for REACH and CLP (CARACAL). The classification procedure is expected to be completed in 2020. Fertilizer Regulation In March 2016, a proposal for a Regulation of the European Parliament and of the Council laying down the rules on the making available on the market of CE marked fertilizing products was published. The new regulation is to replace existing Regulation (EC) No 2003/2003 relating to fertilizers. The proposal introduces tight limits on heavy metal contents in fertilizers, and changes the minimum levels and tolerance for variations in nutrient contents in solid, liquid, mineral, organic, as well as organo- mineral fertilizing products. It also imposes restrictions on component materials used in fertilizer production. The legislative procedure is currently pending at EU institutions. Administrative decisions The Company operates based on an integrated permit, dated January 9th 2014, with amendments. The permit was issued for an indefinite term. In Q2 2018, the Marshal of the Szczecin Province issued a decision amending the integrated permit, in connection with the ongoing upgrade of the EC II CHP plant, including the construction of a flue gas desulfurisation unit based on the wet ammonia process, NOx reduction unit based on Selective Non Catalyctic Reduction, as well as the upgrade of electrostatic precipitators. The Company is obliged to apply, by February 16th 2019, for harmonising the integrated permit with European Commission Implementing Decision (EU) 2017/1442 of July 31th 2017 establishing conclusions concerning the best available technologies (BAT) for large combustion plants in accordance with Directive 2010/75/EU of the European Parliament and of the Council („LCP Conclusions”). Compliance with legal requirements The Company performs regular assessment of the risk of soil, land and groundwater contamination with hazardous substances from the Company’s units. The ‘Assessment of soil, land and groundwater contamination risk’, performed in line with Scheme No. SP-O-P06-01, did not reveal any risk of soil or groundwater contamination in H1 2018.

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Compliance with other legal requirements A new legal requirement laid down in the Waste Act was complied with by the Company as it included in all documents containing full Company details its BDO registration number (related to the Database on Products and Packaging, and on Waste Management): 000016847, assigned by the Marshal of the Szczecin Province (fulfilment of the requirement of Art. 63 of the Waste Act, consolidated text: Dz.U. of 2018, item 992). No environmental fines were imposed on the Group in the reporting period. External inspections In H1 2018, two environmental inspections were carried out by the Szczecin Provincial Inspectorate for Environmental Protection: The first inspection, carried out from May 21st to June 26th 2018 by the Provincial Inspectorate for Environmental Protection, was to check the Company wastewater treatment plant’s and the EC II CHP plant’s compliance with environmental protection regulations. According to the post-inspection report, the permitted level of sulfur dioxide emissions specified in the Transitional National Plan for the EC II CHP plant (boilers K1 and K2) was exceeded in 2017 by 460.20 Mg. From June 4th to June 28th 2018, the second inspection was carried out jointly by the Provincial Inspectorate for Environmental Protection (WIOŚ), the National Labour Inspectorate (PIP) and the State Fire Service (PSP) under the signed declaration of intent to improve work safety, fire safety and environmental protection standards for the chemical industry. The purpose of the inspection was to check the operation of the major industrial accident prevention system. No irregularities were identified by the Szczecin Provincial Inspectorate for Environmental Protection. Safety management In the area of occupational health and safety, including accident prevention, there were no major events of a non-recurring nature during the reporting period which could materially affect the Company’s financial performance. In H1 2018, nine accidents at work were recorded at the Company.

5. Other information Management Board’s position on the achievement of forecasts The Group did not publish any performance forecasts on account of continued unpredictability in the product and feedstock markets on which the Group 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. As no forecasts for 2018 were published, the position of the Parent’s Management Board concerning achievement of such forecasts is not presented. Parent’s branches (divisions) The Company does not operate any branches or divisions outside of its principal place of business. Shares, share issues In the reporting period, the Parent did not issue, redeem or repay any debt or equity securities. Litigation The Company is not party to any proceedings concerning liabilities or receivables that would meet the materiality criteria defined in the Minister of Finance’s Regulation on current and periodic information, dated March 29th 2018 (consolidated text: Dz.U. of 2018, item 757). The total value of all pending court proceedings does not exceed 10% of the Group’s equity.

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Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the first half of 2018 contains 46 pages.

Signatures of Members of the Parent’s Management Board

……………………………… ……………………………… Wojciech Wardacki, Ph.D. Tomasz Panas President of the Vice President of the Management Board Management Board

……………………………… ……………………………… Włodzimierz Zasadzki, Ph.D. Anna Tarocińska Vice President of the Member of the Management Management Board Board

Police, August 24th 2018

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