Directors’ Report on the activities of Grupa Azoty Zakłady Chemiczne Police S.A. and the Grupa Azoty Zakłady Chemiczne Police S.A. Group in the 12 months ended December 31st 2017

Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

This Directors’ Report presents the key events which occurred in the 12 months ended December 31st 2017 at the Grupa Azoty Zakłady Chemiczne Police Group and Grupa Azoty Zakłady Chemiczne Police S.A., the Group’s parent, including results of their operations, as well as a description of relevant risks and threats. It also presents financial and non- financial indicators, if material for the assessment of the Group’s and the parent’s condition, as well as additional explanations on the amounts presented in the consolidated and separate financial statements.

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Contents 1. General information about the Group ...... 5 1.1. Organisation and structure ...... 5 1.2. Changes in the organisational structure ...... 8 1.3. Company organisational and equity ties ...... 9 2. Management of the Group ...... 9 2.1. Parent’s organisational chart ...... 9 2.2. Changes in key management policies ...... 9 2.3. The Group’s workforce ...... 10 3. Business overview ...... 12 3.1. Key information...... 12 3.2. Overview of key products ...... 13 3.3. Sales markets and supply sources ...... 15 3.4. Significant agreements ...... 17 3.5. Significant events ...... 17 4. Growth strategy and policy ...... 18 4.1. Strategy ...... 18 4.2. Directions of development ...... 18 4.3. Growth prospects and market strategy ...... 18 4.4. Key investments in Poland and abroad ...... 20 4.5. Key equity investments ...... 23 4.6. Feasibility of investment plans ...... 24 4.7. Significant R&D achievements ...... 24 5. Financial condition of the Group ...... 25 5.1. Assessment of factors and one-off events having a material impact on the Group’s activities and financial results ...... 25 5.2. Market overview ...... 26 5.3. Key financial and economic data ...... 30 5.3.1. Segments’ financial results ...... 32 5.3.2. Operating expenses ...... 34 5.3.3. Structure of assets, equity and liabilities ...... 35 5.3.4. Financial ratios ...... 38 5.4. Management of capital and assets ...... 40 5.5. Bank deposits ...... 40 5.6. Borrowings ...... 40 5.7. Loans advanced ...... 42 5.8. Sureties and guarantees received and issued ...... 43 5.9. Material off-balance-sheet items ...... 44 5.10. Financial instruments ...... 44 5.11. Expected financial condition ...... 45 6. Risk, threats and growth prospects ...... 46 6.1. Significant risk factors and threats ...... 46 6.1.1. Strategic management ...... 46 6.1.2. Management of fixed production assets ...... 47 6.1.3. Comprehensive customer support...... 49 6.1.4. Availability of feedstock and materials ...... 51 6.1.5. Financial management ...... 51 6.2. Grupa Azoty Group’s significant external and internal growth factors ...... 52 6.2.1. External factors ...... 52 6.2.2. Internal factors ...... 52 7. Equity and other securities and its major shareholders ...... 53 7.1. Total number and par value of Company shares, holdings of Company shares by supervisory and management personnel, and interests of such persons in the Company’s related entities ...... 53 7.2. Treasury shares held by the Parent, Group companies and persons acting on their behalf ...... 54 7.3. Shares of the Parent ...... 54 8. Statement of compliance with corporate governance standards ...... 55 8.1. Corporate governance code applicable to the Parent and the place where the text of the code is available to the public ...... 55 8.2. Declaration of applying the recommendations contained in the ‘Best Practice for WSE Listed Companies 2016’ ...... 56

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8.3. Internal control and risk management systems ...... 60 8.4. Management standards and systems ...... 61 8.5. Shareholding structure ...... 62 8.6. Special control powers of holders of securities ...... 62 8.7. Restrictions on voting rights ...... 62 8.8. Restrictions on the transferability of securities ...... 62 8.9. Rules governing appointment and removal of the management staff. Powers of the management staff, including in particular the authority to resolve to issue or buy back shares ...... 63 8.10. Rules governing amendments to the Parent’s Articles of Association ...... 64 8.11. Operation of the General Meeting ...... 64 8.12. Composition and operation of the Company’s management and supervisory bodies...... 66 8.13. Diversity policy ...... 69 8.14. Remuneration policy ...... 69 8.15. Agreements between the Parent and Management Board members ...... 73 8.16. Sponsorship, charitable or similar activities ...... 73 8.17. Entertainment expenses, legal costs, marketing costs, public relations and social communication expenses, and management consultancy fees ...... 75 9. Other material information and events ...... 75 9.1. Qualified auditor ...... 75 9.2. Environmental performance ...... 76 9.3. Awards and distinctions ...... 78 10. Supplementary information ...... 78

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1. General information about the Group 1.1. Organisation and structure As at December 31st 2017, the Grupa Azoty Zakłady Chemiczne Police Group (the “Group”) comprised Grupa Azoty Zakłady Chemiczne Police S.A. (the “Parent”, the “Company”), and: • nine subsidiaries (in which the Parent held ownership interests above 50%), including two companies in liquidation, • one indirect subsidiary, • two associates (in which the Parent held ownership interests below 50%), including one company in liquidation bankruptcy. Table 1. Parent’s equity interests in subordinated entities as at December 31st 2017

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

Grupa Azoty Police Serwis ul. Kuźnicka 1, 9,618 100.00 0.00 Sp. z o.o. 72-010 Police, Poland ul. Kuźnicka 1, Koncept Sp. z o.o. 512 100.00 0.00 72-010 Police, Poland ul. Monopolowa 6, Supra Agrochemia 51-501 Wrocław, 19,721 100.00 0.00 Sp. z o.o. Poland Transtech Usługi Sprzętowe ul. Kuźnicka 1, 9,783 100.00 0.00 i Transportowe Sp. z o.o. 72-010 Police, Poland Grupa Azoty Route de Ngor Villa No. 132,000 Africa S.A. w likwidacji (in 99.99 0.01 12, Dakar, Senegal thousand liquidation) Zarząd Morskiego Portu ul. Kuźnicka 1, 32,642 99.91 0.00 Police Sp. z o.o. 72-010 Police, Poland ul. Kuźnicka 1, PDH Polska S.A. 180,000 84.54 0.00 72-010 Police, Poland African Investment Group Route de Ngor Villa No. 340,000 54.90 0.10 S.A. (AFRIG S.A.) 12, Dakar, Senegal thousand Infrapark Police S.A. ul. Kuźnicka 1, 14,986 54.43 0.00 w likwidacji (in liquidation) 72-010 Police, Poland budchem Sp. z o.o. ul. Moczyńskiego 8/10, 1,201 48.96 0.00 in liquidation bankruptcy 70-101 Szczecin, Poland ul. Kuźnicka 6, Kemipol Sp. z o.o. 3,445 33.99 0.00 72-010 Police, Poland Route de Ngor Villa No. 33,000 AFRIG Trade SARL 0.00 55.00 12, Dakar, Senegal thousand

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Figure 1. Structure of the Group as at December 31st 2017:

The Parent – Grupa Azoty Zakłady Chemiczne Police S.A. 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. In 2017, the Company took a number of measures to adapt its business to the changing market conditions, which helped mitigate the impact of negative market trends. A flexible business strategy and cost optimisation, following an in-depth analysis of the economic viability of individual projects, as well as decisions anticipating any signals of market developments, underpinned the Company’s solid financial results.

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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.

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.

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African Investment Group S.A. (AFRIG S.A.) The subsidiary, with its registered office in Senegal, was entered in the commercial register (RC) under No. SN-DKR-2002-B-1295. On August 28th 2013, the Company purchased a majority interest in that subsidiary. The subsidiary’s business consists in licenced exploration for phosphate rock and supervision over the preparation of the related documentation. After the reporting date, the company began to wind up its activities.

AFRIG Trade SARL The subsidiary is winding up its activities.

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. 1.2. Changes in the organisational structure Share capital increase at PDH Polska S.A. On April 5th 2017, the General Meeting of PDH Polska S.A. passed a resolution to increase the company’s share capital by way of issue of 5,200,000 new shares. The Company subscribed for 2,917,875 new shares in PDH Polska S.A., with a par value and issue price of PLN 10 per share1. Following the closing of the subscription, the Company was allotted all the subscribed shares. On July 14th 2017, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered the increase in PDH Polska S.A.’s share capital.2 On November 10th 2017, the extraordinary general meeting of PDH Polska S.A. resolved to increase the company’s share capital by PLN 124,000 thousand through an issue of 12.4m new series D shares, which will be paid and subscribed for in 2018 by the existing shareholders, and to expand the PDH project to include the construction of a propylene production unit with auxiliary systems and inter-unit connections3. as well as section 4.5 of this Report.

Distribution of assets of Infrapark Police S.A. w likwidacji (in liquidation) On July 28th and September 12th 2017, INFRAPARK Police S.A. w likwidacji (in liquidation), a subsidiary, took measures to distribute among its shareholders the assets which remained after all claims of creditors have been satisfied and secured, and therefore transferred the ownership of property, plant and equipment and the usufruct of land to the following shareholders: the Municipality of Police and the Company.

Capital increase at Zarząd Morskiego Portu Police Sp. z o.o. On December 21th 2017, the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register, registered an increase in the share capital of Zarząd Morskiego Portu Police Sp. z o.o. by PLN 24 thousand as a result of a contribution made by the

1 For details, see Current Report No. 16/2017 of March 29th 2017; and Current Report No. 18/2017 of March 31st 2017. 2 For details, see Current Report No. 33/2017 of July 18th 2017. 3 For details, see Current Report No. 38/2017 of October 5th 2017, Current Report No. 40/2017 of October 18th 2017, and Current Report No. 42/2017 of November 10th 2017.

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Municipality of Police. Following registration of the capital increase, the Company’s shareholding in Zarząd Morskiego Portu Police Sp. z o.o. fell from 99.98% to 99.91%. 1.3. Company organisational and equity ties Grupa Azoty Police Serwis Sp. o.o. holds one share in African Investment Group S.A. and has the right of representation on the company’s Executive Board. African Investment Group S.A. holds one share in Grupa Azoty Africa S.A w likwidacji (in liquidation). As at December 31st 2017, the proportion of the Company’s voting rights in its subsidiaries and associates was equal to the Company’s respective interest interests held in these companies.

2. Management of the Group 2.1. Parent’s organisational chart Figure 2.Parent organisational chart as at December 31st 2015

Management Board President of the Management Board, Chief Executive Officer

GB Security GO Public GD Central GM Marketing GK Internal Audit GU Safety Office Relations Office Dispatch Division Division Division Department

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

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

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

On February 7th 2018, the Tendering Department was established, with its employees transferred from other Departments. It reports directly to the CEO. 2.2. Changes in key management policies The most important changes in the management policies in the reporting period included: • Amendment to the Company’s Articles of Association (Resolution No. 39 of the Annual General Meeting of July 3rd 2017 to amend the Company’s Articles of Association)4 to ensure compliance with the Act of December 16th 2016 on State Property Management • amendments to and restatement of the Rules of Procedure for the Supervisory Board (Resolution No. 158/VII/17 of the Supervisory Board of December 28th 2017 concerning the Rules of Procedure for the Supervisory Board) to ensure compliance with the Act of December 16th 2016 on State Property Management, • amendments to and restatement of the Rules of Procedure for the Audit Committee (Resolution No. 159/VII/17 of the Supervisory Board of December 28th 2017 concerning the Rules of Procedure for the Audit Committee of the Supervisory Board) to ensure compliance with the Act of May 11th 2017 on Statutory Auditors, Audit Firms, and Public Oversight.

4 For details, see Current Report No. 30/2017 of July 3rd 2017, and Current Report No. 31/2017 of July 3rd 2017.

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2.3. The Group’s workforce Table 2. Number of employees at the Grupa Azoty Zakłady Chemiczne Police Group As at As at Employee group Dec 31 2017 Dec 31 2016 Women Men Women Men Blue collar employees 257 2,143 242 2,048 White collar employees 376 668 360 671 Total 633 2,811 602 2,719

Table 3. Number of employees at the Parent As at As at Employee group Dec 31 2017 Dec 31 2016 Women Men Women Men Blue collar employees 254 1,526 238 1,451 White collar employees 287 452 276 451 Total 541 1,978 514 1,902

Table 4. Number of employees at consolidated subsidiaries* As at As at Employee group Dec 31 2017 Dec 31 2016 Women Men Women Men Blue collar employees 3 617 4 597 White collar employees 89 216 84 220 Total 92 833 88 817 * excluding the Parent

Table 5. Number of Group employees: annual average and at the end of 2017 Employee group Annual average At year end

Women Men Women Men Blue collar employees 257 2,118 257 2,143 White collar employees 368 673 376 668 Total 625 2,791 633 2,811

Table 6. Number of employees at the Parent: average for the year and as at the end of 2017 Employee group Annual average At year end

Women Men Women Men Blue collar employees 254 1,512 254 1,526 White collar employees 281 454 287 452 Total 535 1,966 541 1,978

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

Women Men Women Men Blue collar employees 3 606 3 617 White collar employees 87 220 89 216 Total 90 825 92 833

* excluding the Parent

Table 8. Employee turnover at the Group from January 1st to December 31st 2017 2017 Women Men New hires 71 334 Departures -40 -245 Total 31 89

Table 9. Employee turnover at the Parent from January 1st to December 31st 2017 2017 Women Men New hires 59 221 Departures -32 -145 Total 27 76

Table 10. Structure of the Group’s workforce by education University Total Item Year or Secondary Vocational Primary workforce equivalent Number of employees 2017 3,444 980 1,373 874 217 Number of employees 2016 3,321 934 1,275 865 247

Table 11. Structure of the Parent’s workforce by education University Total Item Year or Secondary Vocational Primary workforce equivalent Number of employees 2017 2,519 743 1,063 556 157 Number of employees 2016 2,416 696 989 548 183

Table 12. Structure of the Group’s workforce by length of service Above 20 Item Year up to 5 years 6−10 years 11−20 years years 534 333 708 1,869 Number of employees 2017 15% 10% 21% 54% 418 314 644 1,945 Number of employees 2016 13% 9% 19% 59%

Table 13. Structure of the Parent’s workforce by length of service Above 20 Item Year up to 5 years 6−10 years 11−20 years years 338 252 549 1,380 Number of employees 2017 13% 10% 22% 55% 247 234 505 1,430 Number of employees 2016 10% 10% 21% 59%

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3. Business overview 3.1. Key information The Group’s performance remains strongly correlated with the Parent’s market environment. This correlation has been present since the Company commenced its operations. The Parent is a leading manufacturer of chemicals in the region and a significant one in the European Union. Currently, it operates in two segments: Fertilizers, Pigments and Other Activities, through three business units and four support centres: • Fertilizers Business Unit, • Nitro Business Unit, • Pigments Business Unit, • Power Centre, • Logistics Centre, • Infrastructure Centre, • Laboratory Analysis Centre.

Fertilizers Business Unit The Fertilizers Business Unit is the largest organisational unit within the Company in terms of revenue and production volumes. The output includes compound NP, NPK and NS fertilizers, as well as phosphoric and sulfuric acids. The Parent is the largest manufacturer of these compound fertilizers and acids in Poland and one of the largest in Europe. Products of the Fertilizers Business Unit are sold in Poland and on foreign markets (including Europe and South America, as well as Africa and Asia). Key products of the Fertilizers Business Unit are POLIFOSKA® and POLIDAP®, which are well recognised fertilizer brands in Poland. The POLIFOSKA® brand has become a generic name for compound fertilizers in Poland, recognised for its superior quality and functional properties. The POLIFOSKA brand has a high concentration of pure constituents, chemical uniformity of fertilizer grains and high assimilability of constituents.

Nitro Business Unit The Nitro Business Unit is one of Poland’s leading manufacturers of ammonia and urea. The products are marketed both on the domestic and export markets. Urea is sold for agricultural and technological applications. An important business line within the unit is the manufacture and sale of urea solutions: NOXy® (AdBlue®), a 32.5% urea solution, and Pulnox®, a 40% urea solution. NOXy® (AdBlue®) is used in the automotive industry to reduce nitrogen oxide emissions from diesel engines. A steady rise in the consumption of NOXy® is expected in Europe in the coming years given the increasingly stringent regulations aimed at reducing atmospheric emissions of exhaust fumes. Pulnox® is also used as a reducing agent in vehicle emissions control technologies. It is widely used in large power units, which generate harmful substances in the processes of burning fossil fuels, including nitrogen and sulphur oxides. Thanks to Pulnox®, power and heat producers can meet stringent EU standards on industrial emissions. The range of products offered by the Nitro Business Unit is supplemented by ammonia water (Likam®). These products are manufactured at production plants which are constantly modernised and upgraded, with an emphasis on occupational safety and environmental protection.

Pigments Business Unit The principal activity of the Pigments Business Unit is the manufacture and sale of titanium white and associated semi-products: iron sulfate and hydrolytic acid. The Unit is the leader in the domestic market of titanium white and operates a well-developed export network. Titanium dioxide-based pigments, marketed under the TYTANPOL® brand, are manufactured using state-of- the-art technology which meets stringent environmental requirements. Thanks to their versatility, efficiency, durability, safety in use and non-toxic nature, they are widely used and pigmented products have excellent aesthetic and protective properties. Titanium white is used, among others, in the production of paints and varnishes, printing inks, plastics, as well as papers and laminates. The consistent high product quality and professional advice on product use have been recognised − the Unit has received many awards and honours such as EUROPRODUKT 2004, MEDAL EUROPEJSKI 2004 (European Medal), the Highest Quality Certificate (2007) and the Teraz Polska Badge of Quality (2012).

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Power Centre The Power Centre produces heat (in the form of hot steam), electricity and feedwater, distributes energy and compressed air, and purchases electricity and heat (steam) for the Company’s needs. It operates state-of-the-art generating units, ensuring reliable supplies of heat, electricity and feedwater. The Centre also sells electricity, hot steam and heating water as well as fly ash to external customers, and is also responsible for energy management across the organisation. In addition, the Centre generates electricity using high-efficiency co-generation technology, and therefore is able to obtain co-generation certificates, which are transferable property rights.

Logistics Centre The Logistics Centre is responsible for shipping, transport, packaging and distribution of feedstock, raw materials and Company’s products, and the operation and maintenance of port infrastructure. In the transport processes, it is important to ensure continuity of supplies, product dispatch handling, transport organisation and services, and operation of ports owned by the Company. There are two port facilities (a sea port and a barge port), which have bulk cargo trans-shipment wharves and trans-shipment stations to handle ammonia and sulfuric acid. The product dispatch process involves efficient fertilizer storage, packaging and distribution. The logistics system handles over 3m tonnes of bulk cargo annually (ca. 1.5m tonnes of feedstock and raw materials and ca. 1.5m tonnes of products).

Infrastructure Centre The Infrastructure Centre is responsible for managing technical infrastructure, production and distribution of cooling and demineralised water, wastewater treatment, and waste landfilling. It is a support centre established for comprehensive management of land and building properties owned by the Company. The Centre carries out inspections required under applicable laws and standards, and manages repairs and maintenance of the production assets. It is also responsible for procurement and storage of technical materials. The Centre’s operations are environmentally friendly, as evidenced by the presence of rare species of flora and fauna in areas adjacent to the Company’s wastewater treatment plant and the phosphogypsum landfill unit.

Laboratory Analysis Centre The Laboratory Analysis Centre satisfies all needs of internal customers regarding chemical analyses of feedstock supplies, implementation of technological processes, evaluation of the quality of finished goods and semi-finished products, environmental protection, OHS, and implementation of new technical and technological solutions. The Centre also provides similar laboratory services to the Company’s external customers. It operates in accordance with the Integrated Management System based on PN-EN ISO 9001 and PN-EN ISO 14001, PN-EN ISO 18001 and PN-EN ISO/IEC 17025:2005. 3.2. Overview of key products The Parent’s principal business is the manufacture of fertilizers and nitrogen compounds (PKD 20.15.Z) and the manufacture of dyes and pigments (PKD 20.12.Z). Its non-core activities comprise the manufacture of other inorganic basic chemicals (PKD 20.13.Z). Under its Company’s Articles of Association, the Company may also conduct other activities necessary to ensure proper operation of its business, including procurement of raw materials, as well as distribution and marketing of products. The Company’s main commercial products include: • compound fertilizers - NP5 (MAP, DAP) and NPK6 mineral fertilizers manufactured using mono- and bi-ammonium phosphate and potassium salt, with secondary nutrient additives (sulfur, magnesium) and microelements • NS fertilizer - nitrogen-based fertilizer with sulfur and magnesium, a granulated mixture of ammonia sulphate, urea and magnesite • nitrogen fertilizer - urea • liquid ammonia • 32.5% urea solution for automotive applications - NOXy™ (AdBlue®)

5 NP fertilizers - compound fertilizers with two primary nutrients: nitrogen (N) and phosphorus (P). • NPK fertilizers - compound fertilizers with three primary nutrients: nitrogen (N) , phosphorus (P) and potassium (K)6

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• titanium white - a group of titanium dioxide-based white pigments. The Parent produces high volumes of sulfuric and phosphoric acid to obtain semi-finished products for the manufacture of its key commercial products. Using its semi-finished products, by-products and waste products as inputs, the Company also manufactures: • hexafluorosilicic acid, • dried iron (II) sulfate.

2017 production Table 14. Parent’s production volumes by product [tonnes] 2017 production 2016 production Product % change volume volume Compound fertilizers 1,157,600 1,142,399 1.33% Urea 399,089 346,150 15.29% Ammonia 557,039 476,650 16.87% Titanium white 38,566 37,171 3.75% AdBlue 145,579 115,606 25.93% Sulfuric acid 750,650 700,200 7.21% Phosphoric acid 374,931 370,760 1.12%

2017 sales Table 15. Consolidated revenue by product Revenue Revenue Product % change 2017 2016 Compound fertilizers 1,458,570 1,485,151 -1.79% Urea 363,660 305,392 19.08% Ammonia 241,735 174,630 38.43% Titanium white 370,139 294,662 25.61% Other 165,474 157,653 4.96% Total 2,599,577 2,417,488 7.53%

In 2017, revenue from sale of compound fertilizers and urea was PLN 1,822,230 thousand, accounting for 70% of total revenue.

Figure 3. Revenue by main product groups and other sales 3% 4% 9% Compound fertilizers

14% Titanium white Urea 56% Ammonia NOXy® (AdBlue®) Other 14%

Revenue from sale of compound fertilizers was PLN 1,458,570 thousand in 2017, having decreased by 1.79% year on year, primarily due to lower prices, which however were largely offset by higher sales volumes. Revenue from sale of urea and ammonia was PLN 363,660 thousand and PLN 241,735 thousand, respectively, having increased on 2016 mainly due to higher sales volumes. The strong

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 14 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) demand for and constrained supply of titanium white helped negotiate higher selling prices of the product and, as a consequence, led to a 25.61% increase in revenue from its sale. 3.3. Sales markets and supply sources In the reporting period, the Group’s revenue from sales on the Polish market was PLN 1,613,659 thousand. Relative to 2016, its share in total revenue declined by 2 pp, while the share of exports increased by 2 pp, to 38%. Domestic and export sales accounted for 69% and 31% of total fertilizer sales, respectively. The key export markets were Germany, the United Kingdom, Hungary, Denmark, Spain, the Czech Republic, Mozambique and Uruguay. Combined sales to those countries accounted for 74% of total export sales. Sales of titanium white on the domestic market accounted for 44% of total sales of the product, with exports making up the remaining 56%. The key export markets were Germany, Italy, France, Sweden, Denmark, Ivory Coast and Belgium. Combined sales to those countries accounted for 89% of total export sales. Forty per-cent of chemicals manufactured by the Group was placed on the domestic market, and 60% was exported, with the key export markets being Germany, Sweden, the Netherlands, Slovakia, Italy and the Czech Republic. Combined sales to those countries accounted for 91% of total export sales. Figure 4. The Group’s sales by geographies (by revenue)* 100%

90% Asia European Union 80% 35.0% 0.2% Other North America 70% Other Africa 0.2% Europe 60% 1.1% 50% South America Africa 40% European 1.3% Union South 30% America Poland 20% 1.4% Poland 10% 60.8% 0% 2017 2016

*EU member states, excluding Poland

No customer/trading partner of the Company accounted for more than 10% of the Parent’s revenue in 2017. In the case of suppliers, only PGNiG S.A., a gas fuel supplier, exceeded the 10% threshold (20.6%).

Sources of strategic raw materials 2017 saw a year-on-year decrease in prices of most key raw materials for fertilizer production, including phosphorites, potassium chloride, sulfur and sulfuric acid. However, prices of natural gas, ilmenite, titanium slag and fine coal increased relative to 2016.

Phosphate rock For most of 2017, prices of phosphate rock continued the downward trend observed since late 2011. In the second quarter, the global supply of phosphorites was disrupted, but this did not halt the decline in prices on international markets. Flooding forced Bayovar, a major Peruvian phosphorite mine, to stop producing, and some of the long-standing customers had to seek supplies from other sources. In China, the government’s environmental controls were extended to include phosphorite producers, which adversely affected the output and supply, and led to shortages of phosphates. China, which is self-sufficient in terms of phosphate rock production, imported small quantities of

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 15 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) this commodity in 2017. In early October and in November, the trend reversed, with most suppliers raising phosphorite prices in the fourth quarter of 2017.

Potassium chloride Early 2017 was a busy period on the potassium chloride market (spring sowing season), relative to the fourth quarter of 2016. In Europe, potassium chloride producers raised their prices by an average of 2%. To reduce the accumulated stocks and support the upward trend in prices, a major US producer of potassium chloride ceased production entirely from one of its mines in January and temporarily reduced production from other mines. In the second quarter, the price of potassium salt in most markets strengthened, despite subdued demand. The only major markets with strong buying potential were Brazil and, early in the quarter, the U.S. The rise in potassium chloride prices was mainly due to the introduction of significant production cutbacks and the behaviour of the largest producers who maintained high prices of the feedstock. In the second quarter of 2017, K+S launched production at a new potassium chloride mine in Canada. This, however, had limited effect on the market, as quality and logistics problems held down sales from the new project. Global potassium chloride trade took an upturn in the second half of 2017. In July, the largest potassium chloride manufacturers signed major supply contracts with China (to be effective until the end of 2017) and India (until July 2018). China and India import 6–9 million and about 3.5 million tonnes of potassium chloride per year, respectively. Demand from Indonesia, Malaysia, Vietnam, and the Philippines also increased. In the US, a drop in the price of potassium chloride prompted distributors to buy and stockpile potassium chloride. Only in Europe, due to a challenging harvesting period and low demand for NPK fertilizers, demand for potassium chloride was weak, keeping the prices flat. Canada’s PotashCorp, the world’s largest manufacturer of potassium chloride, continued its policy of maintaining low stock levels and supply reduction, and planned maintenance shutdowns, lasting from eight to ten weeks, at several of its mines in the fourth quarter of 2017.

Sulfur In the first quarter of 2017, global markets saw both downward and upward trends in sulfur prices. Contract prices of liquid sulfur in Europe did not change in the first quarter of 2017. At the beginning of the second quarter, prices of sulfur in key markets, such as the Persian Gulf, China, the U.S. and Canada, fell. Only in China shortages of sulfur, caused by production constraints, led to a price increase. A 4-5% correction of sulfur prices was seen in Europe (Benelux). In the second half of 2017, an upward trend set in, led by growing demand. Commissioning of several large desulfurisation units was delayed, which coincided with reduced output in the US (caused by hurricanes), technical issues in Canada, and logistics problems in Russia. The prices of liquid sulfur in Europe remained unchanged until the end of the third quarter. An uptrend in global sulfur prices in the fourth quarter of 2017 led also to an approximately 7% increase in prices across European markets.

Ilmenite and titanium slag In 2017, on the representative Chinese market, prices of raw materials for titanium white production (slag and ilmenite) fluctuated between strong increases (from January to March and from June to August) and steep declines (the other months). The variations were attributable to environmental inspections by governmental authorities in China, resulting in production shutdowns and resumptions. On other markets (e.g. in Australia), prices of raw materials for titanium white production were on a slowly rising trend. Low prices of these raw materials in recent years resulted in a lack of major investments in new mines. The supply of raw materials may be insufficient to meet the demand from titanium white production plants operating at full capacity.

Natural gas After a major decline in 2016, 2017 saw rising spot prices on the European gas market. The average annual gas prices at Western European hubs increased by more than 20% on 2016. After the cold beginning of the year and fast withdrawal of gas from storage facilities, when prices trended up, the spring saw a price decline. Over the next two quarters, prices trended horizontally, determined by high prices of coal, which was replaced by gas in the energy mix, and high prices of oil, to which

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 16 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) a part of long-term contracts and most LNG supplies are indexed. In August, the prices began to rise, driven by numerous failures and unscheduled shutdowns of gas infrastructure, resulting in limited gas supplies from Norway and Russia. Further price increases were linked to the start of the heating season and increased demand for gas from households, lower supply from the Groningen field, a surge in LNG prices in Asia, and a gas explosion at Austria’s Baumgarten hub. Then gas prices returned to the level recorded at the beginning of the year. The Group purchased natural gas from PGNiG S.A., the EU market and on the Polish Power Exchange (POLPX). In total, in 2017 the Group purchased 96.7% of gas from PGNiG S.A., 0.6% – on the POLPX, and 2.7% from the EU market. 3.4. Significant agreements Table 16. Agreements material to the Parent’s business Agreement Date and number Parties Subject matter Value date of current report Jan 17 2017 Titania AS Ilmenite purchase Jan 17 2017 Current Report No. 140,000 1/2017 May 8 2017 Office Chérifien des Purchase of May 8 2017 Current Report No. 135,000 Phosphates phosphorites 21/2017 Jun 21 2017 Polskie Górnictwo Naftowe i Supply of gas fuel Jun 21 2017 Current Report No. 1,800,000 Gazownictwo S.A. 28/2017

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 year7. 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 year8. 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 350,000,000.00.9

3.5. Significant events Payment of dividends On June 12th 2017, the Management Board passed a resolution to propose to the Annual General Meeting that a dividend of PLN 31,500 thousand be paid to the Company’s shareholders from the net profit earned in January 1st−December 31st 2016.10

Uniform Procurement Regulations On June 15th 2017, in order to provide systemic solutions for awarding supply contracts, the Grupa Azoty Group put in place Group-wide Uniform Procurement Regulations. The Regulations contributed to the uniformity of procurement and tendering processes at the Company and helped optimise purchases made via the Procurement Platform. The Platform, which is a modern tool supporting procurement processes, was deployed simultaneously across all of the Grupa Azoty Group’s subsidiaries.

7 For details, see Current Report No. 3/2018 of February 6th 2018. 8 For details, see Current Report No. 5/2018 of March 12th 2018. 9 For details, see Current Report No. 11/2018 of April 9th 2017. 10 For details, see Current Report No. 24/2017, of June 12th 2017, and Current Report 26/2017 of June 12th 2017.

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 17 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

Consolidation of Supra Agrochemia Sp. z o.o. The Company decided to consolidated Supra Agrochemia Sp. z o.o, a subsidiary, and recognise the effect to retained earnings as a correction of a prior period error, as the Parent had already controlled the subsidiary in previous periods. In addition, the sale of net assets of Supra Agrochemia Sp. z o.o. is highly probable, and therefore as at June 30th 2017, the assets were disclosed as ‘Non- current assets held for sale’ and ‘Liabilities directly related to assets held for sale’. Other material events with a bearing on the Grupa Azoty Zakłady Azotowe Police Group’s performance and growth are described elsewhere in this Report.

4. Growth strategy and policy 4.1. Strategy The Company is a key entity in the Grupa Azoty Group, whose development and growth plans are defined in the ‘Grupa Azoty Group’s Strategy for 2013–2020’. The methods for driving growth in line with the strategy are laid down in the ‘Grupa Azoty Group’s Strategy for 2014–2020 – Operationalisation’. Since June 2012, when the Strategy was announced, major changes have occurred in the Grupa Azoty Group’s immediate environment, which required updates to the underlying assumptions of the Grupa Azoty Group’s development plans. The plans outlined in the Grupa Azoty Group’s updated Strategy until 2020 account for the recent market developments as well as business cycle fluctuations that bear on results of the Grupa Azoty Group. In the coming years, the Company will focus on attaining the four key objectives set therefor in the ‘Updated Strategy for 2013-2020’, namely further consolidation, strengthening the Company’s position as a solutions provider for the agricultural market, developing non-fertilizer segments as the second pillar of its business, and developing innovations. 4.2. Directions of development The Strategy outlines the Grupa Azoty Group’s key strategic objectives in the main product areas with respect to raw materials, innovations, operational excellence, and financial policy. It also defines the corporate management objectives and methodology applied across the Group. The key development directions for the Grupa Azoty Group include product-related objectives for value-building business segments and for business support functions. In 2017, the Company was engaged in the following initiatives designed to support organic growth of the Fertilizers Segment: • upgrade of the ammonia production unit was completed, which helped to reduce energy consumption and to improve the unit’s production capacity, • a new logistics depot was constructed to increase the fertilizer packaging capacities and streamline the loading and forwarding of palletised fertilizers, and to markedly increase the Company’s product storage capacity, • upgrade of the phosphoric acid unit was continued to increase production efficiency through improved P2O5 recovery, reduce process steam consumption in the acid concentration process, reduce generation of waste phosphogypsum, and reduce the cadmium content in the acid to improve its quality, • upgrade of heat exchangers in the ammonia synthesis unit was commenced. In 2017, the Pigments Segment continued initiatives aligned with the directions set out in the updated strategy. The main objective was to increase the share of sales to strategic customers and to concentrate activity on the European market. In the area of power generation, projects were continued to ensure the Group’s compliance with the Industrial Emissions Directive (IED). 4.3. Growth prospects and market strategy In 2018, the Company will continue to focus on strengthening the value of the Grupa Azoty Zakłady Chemiczne Police Group by seeking new business opportunities and by further strengthening its competitive advantage. More specifically, the Company will strive to: • optimise operating expenses and financing structure, • increase utilisation of the units’ capacities, including through reliability and efficiency improvements, • reduce the consumption of strategic feedstocks and process utilities,

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 18 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

• ensure compliance with environmental and technical safety requirements, • streamline inventory management, • develop technologies, • ensure efficient project delivery, • streamline logistics, • increase the efficiency of support processes, • increase the value of intellectual capital, and • ensure optimal use of the available assets. Growth prospects at the Company are analysed with reference to individual business units as they operate on different markets, offer different products, and are subject to different regulatory regimes, including environmental requirements. To support implementation of the product and market strategy, R&D activities will be carried out in partnership with both third parties and other Group companies, i.e. the Tarnów and Kędzierzyn Chemical Technology Research and Development Centres and the Puławy Competence Centre. The key objective of these R&D activities will be to build knowledge-based competitive advantage to facilitate development of a more innovative product, process and technology portfolio.

Titanium white market The titanium white business unit’s strategy includes a range of initiatives designed to secure stable product sales during economic downturn by retaining key customers across target markets in Europe, maintaining the leading position on the Polish market, keeping up a large product portfolio, and maintaining the proper technical condition of the production facilities. Planned work will focus on improving the plant’s process flexibility, optimising feedstock management to increase the efficiency of the titanium white unit, and expanding the product range to include products targeted at the most demanding customer groups.

Fertilizer market Being of key importance to the Group’s operations, the mineral fertilizers sector remains our focal area. A primary objective in this segment is to step up efforts in the key markets, i.e. Poland and the neighbouring countries, in particular Germany, based on the existing portfolio of phosphate and potassium fertilizers. The Company will continue adding new liquid and specialty fertilizers to its mix, as well as other products and services for the agricultural sector. This strategy requires continued efforts to improve cost-efficiency of the fertilizers business. To that end, process lines are being upgraded mainly to reduce their energy-intensity and operating costs, and to ensure their uninterrupted availability.

Ammonia and urea market In 2018, the Company will carry out further projects to enhance the operational reliability of its ammonia production facilities. Plans have been made to improve the production of urea solutions in terms of its efficiency and cost-effectiveness. Efforts will continue to upgrade the ammonia unit to increase its efficiency while ensuring compliance with environmental regulations.

Power generation Until 2020, the existing coal-fired co-generation plant will continue as the main source of heat and electricity for the production plants. The CHP units will be regularly upgraded to ensure their compliance with the changing legal requirements, particularly the environmental regulations. Measures taken to secure long-term access to heat and electricity will mainly depend on changes in the regulatory regime and market conditions.

New business areas The Group is taking steps to diversify its product portfolio, expand into new business areas, and mitigate business cycle risks in the Fertilizers Segment. As part of this strategy, the Group is carrying out the ‘Police Polymers’ project involving construction of the largest and most advanced PDH propylene unit in Europe and a polypropylene unit. Once brought on stream, these units will lead to a major shift in the structure of the Grupa Azoty Group’s revenue streams, with the non-fertilizers business area increasing its share considerably. The ‘Police Polymers’ project comprises the construction of a propylene unit, a polypropylene unit, auxiliary facilities, a polypropylene logistics depot and a propane and ethylene

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 19 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) handling and storage terminal. The project has been scheduled to break ground in 2019 and to be completed in late 2022. Its settlement is expected to continue until the end of 2023. 4.4. Key investments in Poland and abroad In 2017, the Group’s expenditure on property, plant and equipment and intangible assets was to PLN 226,581 thousand. The Parent’s expenditure on property, plant and equipment and intangible assets was PLN 197,062 thousand, including: • mandatory capex PLN 72,426 thousand; • growth capex PLN 45,813 thousand; • maintenance capex PLN 22,374 thousand; • purchase of finished goods PLN 7,487 thousand; • major overhaul work and other expenditure PLN 48,962 thousand. Figure 5. Structure of capital expenditure by type

25% 37% Mandatory capex

Growth capex

4% Maintenance capex 11%

23% THE GROUP’S KEY INVESTMENT PROJECT In 2017, the Group continued the key investment project of the Grupa Azoty Group, i.e. construction of a PDH propylene unit with auxiliary infrastructure. Steps were also taken extend the scope of the project to include a polypropylene unit. Following the optimization of the investment strategy based on a detailed feasibility study of both the engineering and business aspects of the revised plan, a decision was made to change the scope of the project. In business and commercial terms, adding a polypropylene unit to the PDH project is desirable as demand for polypropylene in Central and Eastern Europe is projected to grow dynamically until 2025 (forecast CAGR of 4.7%). Polypropylene is currently the main and most attractive derivative of propylene, accounting for more than 60% of the consumption of this raw material in Central Europe. Poland is one of the largest consumers of polypropylene in the region with a growing demand-supply gap on the domestic market (250 thousand tonnes in 2016). Construction of a polypropylene unit by PDH Polska S.A. will contribute to the extension of the product chain and thus help seek new business opportunities and generate higher margins. It will also provide the Group with an opportunity to expand into the larger and less saturated polypropylene market, thereby improving its resilience to business cycles. Once brought on stream, the unit will lead to a major shift in the revenue mix of both the Grupa Azoty Zakłady Chemiczne Police Group and the entire Grupa Azoty Group, with the non-fertilizers business area increasing its share considerably. On June 26th 2017, the Management Board of PDH Polska S.A. passed a resolution recommending that construction of a 400,000 tonne polypropylene unit be the preferred option for the project. On the same day, the recommendation was approved by the company’s Supervisory Board11. On August 25th 2017, PDH Polska S.A. obtained a permit (dated August 24th 2017) to conduct activities in the Police Sub-Zone of the Pomeranian Special Economic Zone12. Under the permit, the company is entitled to a CIT exemption (a form of regional support) of up to the equivalent of EUR 26.25m. On October 5th 2017, the management board of PDH Polska S.A. passed a resolution to modify the scope of the PDH propylene project and acquire items of property, plant and equipment in line with the new scope of the ‘Police Polymers’ project. The net amount of the project budget was estimated at EUR 1.27bn, including nearly EUR 1bn in capital expenditure; the balance will include borrowing costs the construction phase, the cost of operation of the SPV established to execute

11 For details, see Current Report No. 29/2017 of June 26th 2017. 12 For details, see Current Report No. 37/2017 of August 25th 2017.

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 20 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) project, and the debt service reserve required in the project finance model. The project will also require a EUR 72m additional working capital facility.13 The higher project budget results mainly from the expansion of the project scope (addition of the polypropylene unit, the necessary auxiliary facilities necessitated, and a polypropylene logistics depot). The project is scheduled to break ground in late 2019, while its completion is expected in late 2022. Fifty per cent of the ‘Police Polymers’ project costs will be financed with senior debt and the balance – with subordinated capital, including equity. On October 12th 2017, the supervisory board of PDH Polska S.A. approved the proposed changes to the project. On November 10th 2017, the general meeting of PDH Polska S.A. passed resolutions approving: (i) changes the ‘Police Polymers’ project, (ii) purchase of items of property, plant and equipment, and (iii) an increase the share capital of PDH Polska S.A., as proposed and presented by the management board of PDH Polska S.A. and approved by its supervisory board on October 12th 201714. In the reporting period, PDH Polska S.A. carried out tasks planned under the ‘Police Polymers’ project. In August 2017, a tender was called to select the Project Management Consultant (PCM); the selection process is pending. In late September 2017, another tender was called, to select the Front End Engineering and Design (FEED) contractor for auxiliary facilities and inter-unit connections of the ‘Police Polymers’ project. The winning tender was selected on December 21st 2017. In October 2017, a tender was called for the conceptual design for the Polypropylene Logistics Infrastructure, with the request for proposals distributed among potential contractors. The winning tender was selected on December 21st 2017. The tender procedure was also continued to select the general contractor for the project. The pre- qualification stage was completed and a group of entities were shortlisted and invited to place their bids. In early 2018, at the next stage of the procedure to select the EPC contractor for the project, an invitation to bid (ITB) was sent to potential bidders. The EPC contractor will be tasked with delivery of the ‘Police Polymers’ project, comprising a propane dehydrogenation (PDH) unit, a polypropylene (PP) production unit, a propane and ethylene storage and handling terminal, auxiliary facilities, inter-unit connections, and polypropylene logistics infrastructure. In parallel with the procedure to select the EPC contractor, steps were taken to secure financing for the ‘Police Polymers’ project. In late 2017, PDH Polska S.A. held meetings with financial institutions, which, as a result, provided letters of intent, whereby they declared capital commitments significantly in excess of the debt financing required for the project. In the reporting period, PDH Polska S.A. held a series of meetings with suppliers of propane and ethylene, i.e. the key feedstocks for the new project, to establish the key terms of future cooperation. Meetings were also held with preselected potential polypropylene customers, including polypropylene distributors and off-takers operating in Poland and on foreign markets. In September 2017, following completion of the environmental impact assessment, the environmental permit for the PDH unit was obtained; the permit does not yet cover the potential expansion of the project scope to include the polypropylene unit. Steps have already been taken to prepare a new environmental impact study and obtain a new environmental permit.

PARENT’S KEY PROJECTS In 2017, the Company launched 27 new projects with a total budget of PLN 53,640 thousand, and continued 43 projects commenced in previous years. The most important projects are presented and described below.

Upgrade of ammonia unit The unit was upgraded to reduce energy consumption of the ammonia production process and improve the operational reliability of its individual systems. With removal of bottlenecks, the unit’s daily capacity increased by 200 tonnes. On completion of the project, the upgraded Benfield systems and the upgraded process and instrument air systems as well as new syngas drying systems and new turbines for the syngas compressors were brought on stream. The unit was fine-tuned to

13 For details, see Current Report No. 38/2017 of October 5th 2017. 14 For details, see Current Report No. 42/2017 of November 10th 2017.

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 21 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) ensure optimum performance, and settlement of the project was completed, including the final settlement with the National Fund for Environmental Protection and Water Management (NFOŚiGW), which co-financed the project. Budget: PLN 156,900 thousand; completed in March 2017.

Development of logistics at Z.Ch. Police S.A. – stage 2 The project led to an increase in the Company’s fertilizer packaging capacity and improvements in loading and forwarding of palletised fertilizers. The new logistics depot was commissioned, and the final settlement of the project was completed. Budget: PLN 29,738 thousand; completed in 2017.

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’s units in line with the requirements of Directive 2010/75/EU. The work on boiler revamping was completed, and the flue gas deNOx unit was assembled. The flue gas desulfurisation unit was completed. An operation permit was obtained for all project facilities. In 2017, the unit was commissioned for initial operation, and on May 31st 2018 a commissioning report was obtained, approving the unit for permanent operation. Budget: PLN 290,885 thousand; expected completion: 2018.

Change of the DA-HF phosphoric acid production technology The objective of the project is to improve the efficiency of phosphoric acid production and the acid’s quality by reducing impurities and waste generation. The new technology is based on a licence from Prayon Technologies S.A. Design work, procurement, and delivery of key instruments and equipment have been completed. In 2017, stage 1 of the project was carried out, comprising construction works outside the phosphoric acid plant buildings. The contractor was selected and the contract was signed for stage 2, comprising construction, installation, electrical, automation- related and commissioning works. Budget: PLN 73,700 thousand, expected completion: 2018.

Computerisation of the I&C and electrical systems of the NPF Department of the PF-4 crude acid unit An advanced production process control system will be deployed to fully automate the technological processes. The upgrades will in particular enable precise dispensing of raw materials and media, continuous tracking and analysis of trends in the production process. The design work was completed. A contractor was selected and the contract was signed. The construction site was handed over to the contractor. Budget: PLN 10,846 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. Assembly works were completed; turbine and pipeline insulating works are in progress. The start-up of electrical installations, oil unit, control and protection systems as well as turbine components commenced. Budget: PLN 16,000 thousand, expected completion: 2018.

Replacement of 17/18E601A and 17/18E601B heat exchangers The objective of the project is to improve the technical condition of key exchangers in the ammonia synthesis unit, increase the efficiency of the apparatus, and improve the reliability of the unit’s operation. Technical documentation for the new exchangers was developed. A contract for the manufacturing and replacement of the exchangers was concluded. Materials were purchased and prefabrication of apparatus started. Budget: PLN 15,500 thousand, expected completion: 2019.

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Replacement of the 311 X PN-2 fertilizer drying unit A new drying unit will guarantee a failure-free fertilizer drying process. The manufacturer delivered the drying unit in October 2017. The device was assembled and built into the unit. Connection works and assembly of the feeding and discharge chambers are in progress. Budget: PLN 12,000 thousand; expected completion: 2018. 4.5. Key equity investments On February 2nd 2017, the capital increase at PDH Polska S.A from PLN 60,000 to PLN 128,000 thousand was registered15. On March 13th 2017, the management board of PDH Polska S.A. passed a resolution to request the company’s supervisory board’s opinion on, and to recommend to the general meeting of PDH Polska S.A., an increase in the company’s share capital by way of issue of 5,200,000 Series C shares with a par value of PLN 10 per share through private placement. On March 29th 2017, the Company’s Management Board adopted a resolution to purchase up to 5,200,000 new Series C registered shares in PDH Polska S.A.; pursuant to the resolution, subject to the Supervisory Board’s consent, it was resolved to acquire, on the first date for the exercise of pre-emptive rights, 2,917,875 new issue Series C registered shares in PDH Polska S.A. with a par value and issue price of PLN 10 per share and with the total par value of PLN 29,178,75016. On March 31st 2017, the Company’s Supervisory Board adopted a resolution to approve the purchase of up to 5,200,000 new Series C registered shares in PDH Polska S.A. The resolution having been adopted, the condition precedent was fulfilled for the implementation of the Management Board’s resolution, dated March 29th 2017, to acquire, on the first date for the exercise of pre-emptive rights, 2,917,875 new issue Series C registered shares in PDH Polska S.A.17 On June 20th 2017, the supervisory board of Grupa Azoty S.A. adopted a resolution to approve the acquisition of 2,282,515 new Series C registered shares in PDH Polska S.A. for an issue price of PLN 10.00, with a total value of PLN 22,821,250. On July 11th 2017, the management board of PDH Polska S.A. allotted in a private placement 2,282,125 Series C shares to Grupa Azoty S.A. and 2,917,875 Series C shares to the Company (at the issue price and par value per share of PLN 10). On July 14th 2017, the share capital increase at PDH Polska S.A. was registered with the National Court Register. Following the registration, the company’s share capital was increased to PLN 180,000,000 and currently comprises 18,000,000 shares18. As a result of the private placement, Grupa Azoty S.A. came to hold 2,782,125 shares in PDH Polska S.A., representing 15.46% of its share capital. The Company holds the remaining 84.54% of shares. On July 18th 2017, it was announced in a current report that on July 14th 2017 the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered the increase in the share capital of PDH Polska S.A. of Police. On October 5th 2017, the management board of PDH Polska S.A. passed a resolution to request the company’s supervisory board’s opinion on an increase in the share capital of PDH Polska S.A. by PLN 124,000,000 through an issue of 12,400,000 new shares with a par value of PLN 10 per share19. On October 12th 2017, the supervisory board of PDH Polska S.A. approved the management board’s proposal to increase the share capital of PDH Polska S.A. The new shares would be acquired by: • the Company, which was offered to subscribe for shares with a par value of PLN 30,000 thousand; • Grupa Azoty S.A., which was offered to subscribe for shares with a par value of PLN 94,000 thousand. In view of the favourable opinion issued by the supervisory board, the management board of PDH Polska S.A. has proposed that the general meeting increase the share capital on the terms set out above20.

15 For details, see Current Report No. 6/2017 of July 18th 2017. 16 For details, see Current Report No 16/2017 of March 29th 2017. 17 For details, see Current Report No 18/2017 of March 31st 2017.of March 31st 2017. 18 For details, see Current Report No. 33/2017 of July 18th 2017. 19 For details, see Current Report No. 38/2017 of October 5th 2017.

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On October 18th 2017, the management boards of Grupa Azoty S.A. and of the Company resolved to acquire new registered shares in PDH Polska S.A. Pursuant to the adopted resolutions, Grupa Azoty S.A. decided to acquire 9,400,000 shares for PLN 94,000,000, and the Company decided to acquire 3,000,000 shares for PLN 30,000,000, in each case by way of subscription for shares in PDH Polska S.A.’s increased share capital21. On November 6th 2017, the Company’s Supervisory Board resolved to approve the purchase of 3,000,000 new Series D registered shares in PDH Polska S.A. with a par value and issue price of PLN 10 per share and total par value of PLN 30,000,000. The purchase will be effected by the Company subscribing for new shares in the increased share capital of PDH Polska S.A. The new Series D shares will be acquired in a private placement (with the pre-emptive rights of the existing shareholders waived in full) after PDH Polska S.A. invites the Company to acquire shares, with the following payment dates: • PLN 7,500,000 to be paid by March 1st 2018; • PLN 22,500,000 to be paid by September 1st 201822. On November 8th 2017, the supervisory board of Grupa Azoty S.A. resolved to approve the acquisition of 9,400,000 new Series D registered shares in PDH Polska S.A. with a par value and issue price of PLN 10 per share and the total par value of PLN 94,000,000. The new Series D shares will be acquired in a private placement (with the pre-emptive rights of the existing shareholders waived in full) after PDH Polska S.A. invites Grupa Azoty S.A. to acquire shares. with the following payment deadlines: • PLN 23,500,000 to be paid by March 1st 2018; • PLN 70,500,000 to be paid by September 1st 2018. On November 10th 2017, the general meeting of PDH Polska S.A. passed a resolution to increase the company’s share capital23. 4.6. Feasibility of investment plans The Company is continuing investment projects commenced in previous years, but also begins new ones. The Company has full capacity to finance its investment projects. Expenditure on property, plant and equipment under the 2018 Investment Plan will be financed, first of all, with the Company’s own resources, working capital and funds available under the Grupa Azoty Group’s New Financing Agreements, intended to finance the Group’s general corporate needs arising from its Strategy and Investment Programme. The available credit limits cover long-term capital expenditure, minimising the risk of the Company failing to carry out its investment plans. Environmental protection projects will be financed with instruments available from non-bank funding sources on preferential terms, such as EU funds or national support programmes. Out of the 70 investment projects currently under way, two were co-financed from such sources. In 2017, the Company also received a non-refundable grant (from the funds of the Norwegian Financial Mechanism 2009–2014) for the implementation of one of the projects referred to above. 4.7. Significant R&D achievements In 2017, the Group’s research and development activities focused primarily on developing new technologies and new products, and on improving technologies currently used by the Group. The total amount of the Company’s R&D expenditure was PLN 2,970 thousand. The work done included adjustment of the manufacturing processes to the requirements of the proposed new fertilizer regulation. Given the proposed reduction of permitted levels of fertilizer contaminants, including cadmium, the Company continued its efforts to improve the quality of its phosphoric acid. Another important direction was the research into the possibility of phosphorus recovery from industrial wastewater, which is in line with the idea of sustainable use of phosphorus and the assumptions of a closed-cycle economy (Circular Economy). The aim is to develop a technology for recovering phosphorus from phosphogypsum landfill leachate, in the form of compounds that can be recycled or be suitable for direct application as a fertilizer.

20 For details, see Current Report No. 39/2017 of October 12th 2017. 21 For details, see Current Report No 40/2017 of October 18th 2017. 22 For details, see Current Report No 41/2017 of November 6th 2017. 23 For details, see Current Report No. 42/2017 of November 10th 2017.

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The Company established cooperation with the West Pomeranian University of Technology in Szczecin on research into non-toxic phosphate pigments. The university received funding for the project from the National Centre for Research and Development. Preliminary laboratory tests were conducted to investigate the impact of surface treatment of titanium white with zinc compounds on increasing the biostatic efficiency of the pigment in exterior wall paints and plasters. The Company manufactures 32.5% high-purity urea solution (NOXyTM) commonly used in heavy goods vehicles to control emissions of nitrogen oxides (NOx). The research is designed to develop a new NOXyTM production technology to make the manufacturing process more cost-effective, while increasing the urea unit’s overall efficiency. The research and development activities also included a technological audit of the TCW-1 cooling system. The study showed potential opportunities and proposals for investments to improve the efficiency of the cooling system.

5. Financial condition of the Group 5.1. Assessment of factors and one-off events having a material impact on the Group’s activities and financial results

One-off events related to AFRIG S.A.

Revaluation of expenditure on exploration and evaluation of mineral resources at AFRIG S.A. On August 1st 2017, AFRIG S.A., a subsidiary, resolved to recognise an XOF 4,241,955 thousand (equivalent to PLN 28,349 thousand as translated at the average exchange rate for the twelve months ended December 31st 2016) impairment loss on exploration and evaluation expenditures related to services performed under a contract with AVES FZE as a correction of a prior period error. In the course of analyses of the documentation owned by the subsidiary, no substantive bases were identified to support the capitalisation of the expenditure in previous years. Accordingly, it was determined that the expenditure neither had brought nor would bring economic benefits. At the same time, in the light of information available in December 2016, including a report lodged with the prosecution service on alleged abuse, the Management Board of the Parent concluded that the impairment loss should have been recognised already in 201624.

Execution of conditional arrangement agreement involving termination and reversal of the effects of the agreement to purchase shares in AFRIG S.A. In connection with claims raised by the Company for reimbursement of undue tranches of the purchase price of 55% of shares in African Investment Group S.A. of Dakar, on December 20th 2017, the Company and DGG ECO Sp. z o.o. executed a conditional agreement (confirmed by court settlement). The agreement is to be finalised by way of mutual confirmation of the termination and reversal of the effects of the agreement of August 28th 2013 under which the Company acquired a majority interest in AFRIG S.A., having paid a total of USD 28,850 thousand towards the purchase price. The reversal of the effects of the above-mentioned agreement is to include reimbursement to the Company of all amounts paid by it for the shares in AFRIG S.A. against re-transfer of the shares to DGG ECO Sp. z o.o. The agreement was originally to be finalized by February 28, 2018, assuming that the required corporate approvals would be issued within this period, and the Company would receive the first tranche of the price refund and a bank guarantee securing the refund of the remaining price, to be effected in quarterly instalments, the last of which would be payable by December 31st 2022. The guarantee would also partly secure repayment by AFRIG S.A. of a credit facility of up to EUR 22,000,000 contracted by AFRIG S.A. and the Company, the servicing and repayment of which is to be continued by AFRIG S.A. Consummation of the agreement is also to result in cancellation of AFRIG S.A.’s liabilities towards the Parent, except for any claims arising in connection with repayment of the credit facility.25 As DGG ECO Sp. z o.o. failed to pay the first tranche of the refund of the purchase price for shares in African Investment Group S.A. by February 28th 2018 and also failed to provide a bank guarantee securing the refund of the remaining part of the price, the conditional arrangement agreement concluded between the Company and DGG Eco Sp. z o.o. was not finalised by the agreed deadline.

24 For details, see Current Report No. 35/2017 of August 2nd 2017. 25 For details, see Current Report No. 43/2017 of December 20th 2017..

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Nevertheless, the Company continued talks with DGG Eco Sp. z o.o., which carried on with the efforts aimed at fulfilling the conditions for finalising the agreement26. The conditional arrangement agreement was not finalised in the agreed additional deadline, either.27 The parties continue discussions.

Recognition of impairment loss on exploration and evaluation assets relating to AFRIG S.A. in the Company’s consolidated financial statements Having regard to all circumstances of the phosphate rock project in Senegal and the protracting process of negotiating and finalising the terms of the arrangement agreement between Grupa Azoty Zakłady Chemiczne Police S.A. and DGG ECO Sp. o.o. whose purpose was to recover undue payments made towards the purchase price for shares in African Investment Group S.A. and the implementation of which could confirm the value of the exploration and evaluation assets recognised in the consolidated financial statements, on March 7th 2018 the Company’s Management Board passed a resolution to recognise, at December 31st 2017, an impairment loss for the entire amount of AFRIG S.A.’s exploration and evaluation intangible assets of XOF 5,854,799 thousand (i.e. PLN 37,178 thousand, translated at the exchange rate effective for the reporting date); The impairment loss is disclosed in the Company’s consolidated financial statements for 2017.28 Insolvency of African Investment Group S.A. and filing of the bankruptcy petition. On March 29th 2018, African Investment Group S.A., a subsidiary of the Company with a share capital of CFA 340 000 thousand (PLN 2,169 thousand, translated at the mid exchange rate for March 28th 2018), acting through its legal representative (CEO), declared insolvency, and accordingly filed a petition for bankruptcy with the Commercial Court of Dakar. 29 5.2. Market overview As in previous years, the financial results of the Group in the reporting period were strongly correlated with the situation in the Company’s market environment. Presented below are factors with the greatest impact on the results reported for 2017: • grain prices on global markets were relatively high at the beginning of the year, and dropped on promising harvest forecasts, • unfavourable weather conditions adversely affected the financial performance of many farms in Poland, reducing the volume of winter crops, and thus adversely affected the volume of NPK purchases in autumn, • poor quality of part of the harvest affected farmers’ cash flows and disrupted their financial liquidity, • outside the spring season, the demand for NPK fertilizers in Europe was weak: in France and Spain, NPK production facilities were temporarily shut down for scheduled maintenance, • Russian and Ukrainian markets saw an increase in the consumption and sales of NPK fertilizers, • prices of NPK fertilizers on world markets in 2017 were stable, but the average annual level of prices was lower than in 2016, • limited shipments from the US, China and Morocco, as well as low stocks contributed to higher DAP fertiliser prices at the beginning of the year, • DAP prices fell after the spring season, but the trend reversed in the second half of the year on the back of stronger demand on a number of markets in the fourth quarter of 2017, driven by stock building before the coming spring season, • annual average prices of key feedstocks for the production of compound fertilizers (phosphate, potassium salt and sulfur) were lower than in 2016, however, after a period of declines, the trend reversed during the year, • an increase in average annual prices of natural gas, the key feedstock for ammonia production, significantly affected production costs, • market prices of ammonia once again saw a few months of steep rises and declines − in July, the price reached its low, but shutdowns of many units for emergency, maintenance and balancing purposes as well as the growing demand on several markets resulted in the price increase from August to the end of the year, • shutdowns of Chinese urea production units due to environmental reasons caused urea shortages

26 For details, see Current Report No. 4/2018 of March 1st 2018. 27 For details, see Current Report No. 6/2018 of March 17th 2018. 28 For details, see Current Report No. 7/2018 of March 17th 2018. 29 For details, see Current Report No. 7/2018 of March 17th 2018.

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on the Chinese market and led to exports restrictions, • due to financial reasons, India limited its urea purchases to the necessary minimum, • shutdowns of titanium white capacities in China and a serious failure of a titanium white production unit in Finland limited the material’s supply, • given the supply constraints, growing demand for and low stocks of titanium white resulted in a systematic increase in prices in the subsequent quarters of 2017.

Macroeconomic conditions on the agricultural market

Poland In agriculture, 2017 was marked by difficult weather conditions, which had an adverse effect on the economic performance of many farms in the closing months of the year. In spring, frosts caused significant damage to fruit trees (up to 50%) and vegetable plantations. The frosts also damaged many of the rape plantations. In several regions, the weather made harvest very difficult, many plantations were destroyed by excessive rainfall and storms, and farming vehicles could not access flooded fields. Crops were of poor quality, and often grains were not even suitable for feed. In autumn, excessive soil moisture hampered sowing of winter oilseed rape. It is estimated that about 20% less of winter rape was sown compared to the previous autumn. Root crops and corn harvests were also poor, and many farmers did not harvest gain corn before the end of December. In the eastern Poland, many herds of pigs were slaughtered due to the ASF disease, and the compensations did not cover all the outlays. As a result of the above factors, farmers incurred additional costs, and did not recover the initial outlays. The financial situation of many farms is difficult, and many households face financial liquidity problems. The declared 70% advance area payments disbursed in November and December were often as little as 10%, and some farms did not receive any support. The payment of subsidies somewhat alleviated and delayed financial difficulties of many farms, but did not solve the problem. Due to the high risk of insolvency, traders tend to be very cautious about selling fertilizers on deferred payment. As the global supply of grains was high, their prices were rather moderate in Poland. For similar reasons, the price of rapeseed fell by about 20% over the year. In 2017, high purchase prices of milk and pigs maintained, which partially made up for the losses incurred by these sectors in the previous years.

Europe and the world At the beginning of 2017, prices of wheat, rapeseed and corn on the MATIF exchange in Paris were rather stable and fairly high. In March, prices of those crops reached their two-year highs. Forecasts for high yields triggered a decline in prices on global markets. Strong competition from exporters operating in the Black Sea region (including Russia, Ukraine and Romania) and continued appreciation of the euro against the US dollar remained among the key factors which put pressure on wheat prices on the Paris exchange and curbed wheat exports from the European Union to non- EU countries. In September, EU import duties were lowered for biodiesel from Argentina, from 22%– 25.7% to 4.5%–8.1%, which translated into a decline in prices of rapeseed on the EU markets.

NPK fertilizers

Poland In the first quarter of 2017 (in March), the NPK fertilizer market picked up. Retailers maintained adequate stocks of NPK fertilizers from Polish producers, but also provided NPK fertilizers imported from Norway, Finland, Russia and Belarus. The second quarter of 2017 saw a decline in sales of NPK fertilizers, and producers offered after- season discounts. Manufacturers restocked retail and distribution warehouses with NPK fertilizers under storage contracts. Poor quantity and quality of the harvest curtailed cash inflows to agricultural farms, causing disruptions in their financial liquidity. Unfavourable weather conditions reduced winter crop sowing: for example, rapeseed acreage shrank by 20%, thus limiting the volume of NPK fertilizer purchases in the autumn.

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Western Europe On European markets, the demand for NPK fertilizers remained generally weak throughout 2017, and only some markets recorded periodically increase turnover. Subdued demand for NPK fertilizers was caused primarily by low income in the agricultural sector. In France, it was only the spring demand that led Timac and Seco to launch NPK fertiliser production units had been idle since December 2016. Despite poor sales in the first quarter, manufacturers increased the prices of standard NPK fertilizers. Save for local pockets of demand, in the second quarter demand for NPK fertilizers was depressed in most European markets. In June, European manufacturers introduced discounts on NPK fertilizers, hoping to stimulate sales before the autumn application season. In the second half of the year, Europe did not see increased purchasing in NPK markets. In France, manufacturers delayed announcement of new prices for the autumn season. In Spain, waiting for stronger demand, Fertieria and Fertinagro shut down their NPK units in August. In September, five largest French manufacturers suspended offering of NPK fertilizers. Prices of NPK fertilizers in Europe remained flat over the year, except a 3–4% cut in prices of basic NPK fertilizers for November seen in the UK at the end of October.

Russia At the beginning of the quarter, the demand for NPK fertilizers on the Russian market, the neighbouring markets and in western Europe was weak, so the Russian manufacturers focused on sales outside Europe and shipped large cargoes to China, India, Vietnam, Thailand, Malaysia, Kenya and Benin. In May, Russian producers started to shift their attention towards more profitable destinations, i.e. the internal market, the Baltic States, Ukraine and Poland. The fast growing Russian agricultural sector is consuming increasing amounts of fertilizers, including NPK products. Sales of NPK fertilizers in Russia are estimated to have grown in 2017 by 13%–15% year on year. From May to August, approximately 200 thousand tonnes of NPK fertilizers were sold on the domestic market each month, with sales gradually declining from September towards the year’s end.

Ukraine According to forecasts, consumption of NPK fertilizers in Ukraine will be higher than in the previous year, when it stood at 1.28m tonnes. Ukraine’s fertilizer output is small, therefore shortages of NPK fertilizers are covered by imports. Russian and Belarusian manufacturers, which account for 80% of imports, are the main suppliers of NPK fertilizers to Ukraine. The plant operated by Sumychimprom, Ukraine’s only NPK manufacturer, remained shut down in the first half of 2017. In the second half of the year, own production in Ukraine was approximately 10 thousand tonnes per month.

Belarus Average monthly production of NPK fertilizers in Belarus amounts to 80 thousand tonnes. The production is sold mainly to the Ukrainian and Polish markets, as well as to the Baltic countries and the internal market.

POLIDAP® Manufacturing and shipment constraints in the United States, China and Morocco, which continued since the autumn of 2016, were the main drivers of the situation on the DAP/MAP market at the beginning of 2017. On many markets, stocks accumulated ahead of the spring application season were low, hence increased purchases in early 2017. The high demand on many markets encouraged manufacturers to raise the prices. In the second quarter, the DAP season ended on global markets and in Europe, resulting in a downward trend in DAP prices, as most global manufacturers started to cut their prices in order to sell their planned output. After a period of decline between March and September, from October the price of DAP showed an upward trend. The markets in the US, Canada, China, Europe, Pakistan, Japan, and Australia saw DAP stocks being accumulated before the spring application season. In September 2017 some DAP capacities in the US were taken off stream for a prolonged period due to damage caused by the hurricanes.

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Figure6. Monthly average prices of NPK and DAP fertilizers in 2017 [USD/t] 400

300

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DAP NPK

In late 2017, several significant developments affected the DAP market, with their effects particularly visible in 2018: In mid-December, Mosaic shut down a production unit, with an annual capacity of 2 million tonnes of DAP, for a period of one year. The unit’s output accounted for about 50% of DAP production in the US. The shutdown will have a significant impact on both the US and global markets. Further lines of a new production unit (with an annual capacity of 3m tonnes) were being commissioned in Saudi Arabia. In the fourth quarter of 2017, the construction of a new DAP unit (with an annual capacity of 1m tonnes) was completed in Morocco. Its launch is scheduled for the first quarter of 2018, subject to completion of investments that will increase the fertilizer loading capacities of ships.

Ammonia and urea In the first quarter of 2017, the ammonia prices remained high and stable. At the end of the quarter, two new ammonia units were launched in the US, and the country – previously a large importer – became a major exporter of ammonia. US producers began exporting ammonia from the new facilities, with the destinations including North Africa and Europe, and the price decline on the American market led to ammonia prices falling also in other markets. In July, the price of ammonia hit its new low. Maintenance and balancing shutdowns of a number of ammonia units (in Russia, Algeria, Egypt, Ukraine, Indonesia, Belarus, Norway and Belgium), as well as a gradually growing demand in the US, Russia, Morocco, Europe and Ukraine continued to push up ammonia prices from August to the end of 2017 (up 45% by the end of the year). Figure 7. Monthly average prices of ammonia and urea in 2017 [USD/t] 400

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Urea Ammonia

In 2017, prices of urea were exceptionally volatile and fluctuated from USD 175/t to USD 275/t. The urea market was driven mainly by the situation in the US, China and India. Over the past few years, the urea market in the US has changed significantly as new production capacities were launched, reducing the country’s dependence on imports by 50%. However, imports of additional 3-4m tonnes of urea are still necessary. In China, due to environmental shutdowns, the actual output of urea was around 50–55% of the country’s capacity throughout 2017. This resulted in growing urea shortages on the Chinese market and thus restricted exports, from the 14m tonnes in 2015 and 5m tonnes in 2017 to a point where urea imports were needed to satisfy demand (December 2017). Countries of south-eastern Asia, so far dependent on the urea from China, started to source urea (0.5m tonnes quarterly) elsewhere. India, the world’s largest importer of urea, limited its purchases to the necessary minimum due to financial reasons. Urea prices were also driven by the production situation (repairs, shutdowns, and

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Titanium white Throughout 2017, the prices of titanium white were on the rise up across all global markets. The increase was mainly due to lower output, seasonal and cyclical growth in demand, and low stocks kept by manufacturers. The decline in output resulted from closure of a number of titanium white units over the recent years and a severe failure, in early 2017, at a production plant in Finland which satisfied about 10% of the demand in Europe. Moreover, around 15% of China’s production plants were decommissioned for environmental reasons; Chinese capacities represent 30% of the world’s total. The prices of titanium white have been rising since 2016, and the manufacturers expect further price increases in 2018. The prices are already at their all-time high and 2018 is likely to see the increase decelerate to the point of price stabilisation. Figure 8. Monthly average prices of titanium white in 2017 [EUR/t] 3 000 2 500 2 000 1 500 1 000

Titanium white

Other products Technical-grade urea is used mainly to produce glues for the furniture industry and to prepare the NOXY® (AdBlue®) solution. In 2017, the demand for urea used in glue production was stable. In the NOXY segment, sales increased, despite strong competition. It was a result of the Grupa Azoty’s group-wide strategy for the RedNOX® segment (products designed to reduce nitric oxide emissions in the automotive industry and the manufacturing): 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 2017, the demand for iron sulfate remained high across European markets. This demand was particularly strengthened following the failure of the titanium white plant in Pori, Finland (February 2017), whose annual output of iron sulfate is approximately 390 thousand tonnes. Iron sulfate is mainly used in the cement industry, in wastewater treatment plants and for fertilizing purposes. The volume of purchases by various customers fluctuated during the year. The high sales of iron sulfate to the cement industry continued in the second and third quarters of 2017. 5.3. Key financial and economic data The Group’s key achievements in 2017: • the Group’s net profit more than doubled on 2016, • the profitability ratios improved year on year, • the Pigments Segment reported the best financial result and the highest profitability in six years, • there was a 21% year-on-year increase in the financial result of the Fertilizers Segment, despite a difficult market environment, • Police delivered the highest sales volumes of compound fertilizers in the last several years, in particular in Poland, which is the Group’s priority market, • the Group reported a high volume of ammonia sales, • key investment projects were continued under the new name of ‘Police Polymers’, with the scope of the project extended to include a polypropylene plant. In 2017, the Group posted a net profit of PLN 88,508 thousand, with EBIT at PLN 128,371 thousand, and EBITDA of PLN 230,519 thousand. Year on year, net profit and EBIT increased by PLN 48,414 thousand (or 121%) and PLN 58,104 thousand (or 83%), respectively. In the reporting period, the

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 30 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) financial results performance of the Group were strongly correlated with the Parent’s market environment. This correlation has been present since the Company commenced its operations. The impairment losses for assets of AFRIG S.A. had a material adverse effect on the Group’s results. In 2017, the Group recognised a PLN 37,791 thousand impairment loss on AFRIG S.A.’s intangible assets related to exploration for and appraisal of mineral resources; the loss was disclosed under other expenses. In the reporting period, the Company earned a net profit of PLN 133,206 thousand, an increase of PLN 69,223 thousand on 2016. The amount of EBIT was PLN 178,892 thousand, an increase of PLN 65,895 thousand year on year. The Company’s results were higher than those of the Group as they were not affected by the one- off events related to the subsidiary AFIRG S.A.; they were recognised as impairment losses and bore on the results for 2017 and the previous year. The results for the reporting period were also affected by environmental provisions, which reduced EBIT by PLN 14,889 thousand, and accrued expenses of PLN 6,904 thousand related to exceeding the SO2 emission limit. The increase in other expenses and decrease in EBIT were also attributable to litigation provisions of PLN 3,205 thousand, PLN 2,726 thousand provisions for property damage compensation, and a PLN 3,150 impairment loss for property, plant and equipment under construction (costs incurred on the initial phase of the phosphate rock project in Senegal). In 2017, the Company continued measures to adapt its business to the changing market conditions, commenced in 2016. Decisions made ahead of anticipated changes in the market, based on early warning signals, mitigated the effects of adverse trends seen on the product markets and enabled the emerging opportunities to be pursued. The Company’s Management Board supported cost optimisation measures initiated based an in-depth analysis of the rationale for each project and available opportunities and possibilities to modify or reschedule ongoing projects. A flexible approach to business strategy allowed the Group to maintain high volumes of product sales, and helped to align the sales strategy with the changing situation on individual markets. Particular emphasis was placed on increasing the Group’s share in the domestic market of compound fertilizers, which resulted in high sales volumes. Financial data for 2016 was restated on account of the changes described in Note 2.4 to the consolidated financial statements for the 12 months ended December 31st 2017.

Table 17. Consolidated financial results Item 2017 2016 change % change 2,417,48 Revenue 2,599,577 182,089 7.5 8 1,998,73 Cost of sales 2,127,968 129,238 6.5 0 Gross profit 471,609 418,758 52,851 12.6 Selling and distribution expenses 112,976 116,092 -3,116 -2.7 Administrative expenses 167,764 180,687 -12,923 -7.2 Net profit on sales 190,869 121,979 68,890 56.5 Other income/(expenses) -62,498 -51,712 -10,786 20.9 EBIT 128,371 70,267 58,104 82.7 Finance income/(costs) -14,825 -15,153 328 -2.2 Share of profit/(loss) of equity-accounted associates 13,103 11,863 1,240 10.5 Profit before tax 126,649 66,977 59,672 89.1 Income tax 38,141 26,883 11,258 41.9 Net profit/(loss) 88,508 40,094 48,414 120.8

In 2017, the Company took extensive measures to secure lower prices of key raw materials and feedstock used in the production processes. Effective efforts in raw materials procurement were reflected in lower prices of key materials, including phosphate rock, potassium chloride and sulfur. The active procurement policy delivered substantial measurable benefits in terms of partial offsetting of gas price increases and, consequently, improved financial results.

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 31 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

Table 18. Financial results of the Parent Item 2017 2016 change % change Revenue 2,585,370 2,385,094 200,276 8.4 Cost of sales 2,129,112 1,999,602 129,510 6.5 Gross profit 456,258 385,492 70,766 18.4 Selling and distribution expenses 112,963 117,173 -4,210 -3.6 Administrative expenses 136,111 148,913 -12,802 -8.6 Net profit on sales 207,184 119,406 87,778 73.5 Other income/(expenses) -28,292 -6,409 -21,883 341.4 EBIT 178,892 112,997 65,895 58.3 Finance income/(costs) -4,990 -27,453 22,463 -81.8 Profit before tax 173,902 85,544 88,358 103.3 Income tax 40,696 21,561 19,135 88.7 Net profit/(loss) 133,206 63,983 69,223 108.2

In 2017, the Company delivered optimum results in the context of the prevailing market environment. Also, as part of its streamlining efforts, the Company reviewed and reassessed its existing contracts and agreements, which allowed it to reduce administrative expenses by PLN 12,802 thousand compared with 2016. 5.3.1. Segments’ financial results In 2017, the Group delivered strong results in both the Fertilizers Segment and the Pigments Segment. Another factor which significantly contributed to the Group’s performance was the Group’s ability to take advantage of the improved situation on the titanium white market, which led to a strong year-on-year increase in the Pigment Segment’s EBIT. The Fertilizers Segment’s EBIT was 21% higher than in the previous year. Table 19. EBIT by segment in 2017 Grupa Azoty POLICE Group Parent Item Other Other Fertilizers Pigments Fertilizers Pigments Activities Activities Revenue from external 2,167,484 385,699 46,394a 2,168,830 385,700 30,840 sales Share 83% 15% 2% a 84% 15% 1% EBIT 62,074 75,892 -9,595 a 105,185 75,821 -2,114

Table 20 EBIT by segment in 2016 Grupa Azoty POLICE Group Parent Item Other Other Fertilizers Pigments Fertilizers Pigments Activities Activities Revenue from external 2,050,048 308,035 59,405a 2,046,515 308,035 30,544 sales Share 85% 13% 2%a 86% 13% 1% EBIT 51,179 13,624 5,464a 84,234 13,541 15,222

The increase in the Fertilizers Segment’s EBIT was driven by sales of phosphate fertilizers, which increased year on year, despite the lower prices of NPK fertilizers. The increase in EBIT was also attributable to lower prices of key feedstocks (phosphate rock, potassium chloride and sulfur). In 2017, sales of nitrogen products did not change significantly year on year, with revenues driven by several diverse factors: a significant increase in ammonia and urea sales volumes and higher average

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 32 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) selling prices, coupled with an increase in the price of natural gas. The segment’s revenue increased by 6% year on year.

Figure 9. The Group’s revenue by segment

2 400 000

2 000 000 2016 2017

1 600 000

1 200 000

800 000 Pigments Fertilizers 400 000 Other activities Other 0

Figure 10. The Group’s revenue by segment 2017 2016 2% 2% 15% 13%

Fertilizers Pigments Other Activities

85% 83%

The shares of individual segments in total revenue changed slightly year on year: the Fertilizers Segment’s share decreased by 2pp, while that of the Pigments Segment increased by 2pp, with the share of other sales unchanged.

Fertilizers In 2017, the Fertilizers Segment’s revenue was PLN 2,167,484 thousand, accounting for 83% of the Group’s revenue. The segment’s EBIT was positive at PLN 62,074 thousand. On average, domestic sales accounted for 69% of the segment’s total sales, having increased by 2pp. In 2017, compound fertilizers accounted for the highest share in the Parent’s revenue by product group, representing over 56% of total revenue. Relative to 2016, changes in the shares of individual product groups in total revenue followed the changes in the market environment. Revenue from sale of compound fertilizers was PLN 1,458,570 thousand in 2017, a decrease of 1.8% year on year. The main cause of the decrease was a 7% drop in selling prices of NPK fertilizers. The prices of compound fertilizers dropped by 6% on average, while sales volume increased by 4%.

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 33 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

Figure 11. Consolidated revenue of the Fertilizers Segment

700 000 2 500 +6% 600 000 2 000 500 000 400 000 1 500 300 000 1 000 200 000 500 100 000 0 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2016 2017 2013 2014 2015 2016 2017

In 2017, revenue from sales of urea was PLN 363,660 thousand, having increased by 19% year on year. The increase was to a large extent attributable to a 18% increase in the sales volume. Revenue from sales of ammonia increased by 38% year on year, mainly due to an increase in the ammonia price (7%) and a simultaneous increase in ammonia sales volume (29%).

Pigments There was a marked improvement in the Pigments Segment’s market in 2017, which led to a strong increase in revenues and overall results. The Pigments Segment’s revenue was PLN 385,699 thousand, which represented 15% of the Company’s revenue. Year on year, the segment’s revenue increased by 25%. Approximately 56% of the segment’s revenue was derived from sales on foreign markets. The segment’s EBIT was highly positive and increased by several orders of magnitude over 2016.

Figure 12. Consolidated revenue of the Pigments Segment

120 000 500 +25%

100 000 400 80 000 300 60 000 200 40 000 20 000 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0

2016 2017 2013 2014 2015 2016 2017

Revenue from sale of titanium white was PLN 370,139 thousand in 2017, and increase of 26% year on year. The volume was nearly as much as in 2016 and was close to the Company’s maximum production capacity. Titanium white prices increased by over 25%.

Other Activities Revenue recognised under ‘Other Activities’ accounts for approximately 2% of the Group’s total sales. In 2017, the consolidated EBIT under ‘Other Activities’ was negative. EBIT was significantly affected by the subsidiaries’ financial results, impairment loss recognised for the expenditure incurred in the initial phase of phosphate-rock project in Senegal (PLN 3,150 thousand), and recognition of provisions for employee litigations.

5.3.2. Operating expenses The Group’s operating expenses were PLN 2,411,627 thousand in 2017, having increased by PLN 130,840 thousand (or 6%) year on year. The increase mainly related to raw materials and consumables used (representing almost 70% of total expenses). The year-on-year increase in raw materials and consumables used was driven by

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 34 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) higher sales and output of all of the Company’s products, as well as a higher price of natural gas, a key feedstock for ammonia and urea production. Completion of several investment projects and major overhaul works resulted in higher depreciation charges. Salaries and wages, including overheads, increased year on year, chiefly due to the execution of collective pay agreements. Cost of services increased mainly due to higher costs of transport services driven up by higher sales volume. Taxes and charges increased mainly on the higher cost of CO2 emission allowances. Administrative expenses decreased materially (by 7%) across the Group (9% at the Parent), thanks primarily to optimisation measures implemented by the Management Board and reduction of costs in such areas as consultancy and legal services, advertising, IT and insurance.

Table 21. The Group’s costs by nature of expense Item 2017 2016 change % change Amortisation and depreciation 102,148 89,241 12,907 14 Raw materials and consumables used 1,637,424 1,532,521 104,903 7 Services 187,497 170,503 16,994 10 Salaries and wages, including overheads, and 335,004 323,395 11,609 4 other benefits Taxes and charges 100,268 88,704 11,564 13 Other costs by nature of expense 49,286 76,423 -27,137 -36

Table 22. The Parent’s costs by nature of expense Item 2017 2016 change % change Amortisation and depreciation 99,970 88,170 11,800 13 Raw materials and consumables used 1,618,885 1,530,148 88,737 6 Services 246,500 232,743 13,757 6 Salaries and wages, including overheads, and 251,233 242,415 8,818 4 other benefits Taxes and charges 94,591 85,967 8,624 10 Other costs by nature of expense 47,598 74,834 -27,236 -36

5.3.3. Structure of assets, equity and liabilities In 2017, the Group’s assets were PLN 2,165,926 thousand, having increased by 7% on the end of 2016. As at December 31st 2017, the amount of non-current assets was PLN 1,526,886 thousand, and current assets were PLN 639,040 thousand.

Year on year, the most significant movements in assets in 2017 included: • a 9% (PLN 110,972 thousand) increase in property, plant and equipment, attributable to the completion of new investment projects, • a 51% (PLN 49,205 thousand) increase in cash and cash equivalents in bank accounts, • a 3% (PLN 6,212 thousand) increase in trade and other receivables on higher revenue at the Parent, • a 51% (PLN 35,465 thousand) decrease in intangible assets mainly attributable to the recognition of an impairment loss on intangible assets related to exploration for and appraisal of mineral resources at AFRIG S.A., • a 55% (PLN 6,492 thousand) decrease in Agrochemia Sp. z o.o.’s investment property, following the reclassification of that company’s assets to ‘Non-current assets held for sale’ (the sale of assets of Supra Agrochemia Sp. z o.o. is highly probable).

Table 23. Structure of the Group’s assets Item 2017 2016 change % change Non-current assets, including: 1,526,886 1,461,038 65,848 5 Property, plant and equipment 1,407,252 1,296,280 110,972 9

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 35 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

Usufruct of land 6,690 6,821 -131 -2 Investment property 5,381 11,873 -6,492 -55 Intangible assets 34,013 69,478 -35,465 -51 Equity-accounted investees 26,964 25,712 1,252 5 Other receivables 9,154 3,388 5,766 170 Deferred tax assets 37,432 47,486 -10,054 -21 Current assets, including: 639,040 565,247 73,793 13 Inventories 253,108 234,981 18,127 8 Property rights 32,223 37,993 -5,770 -15 Derivative financial instruments 0 2,189 -2,189 -100 Current tax assets 832 0 832 - Trade and other receivables 200,498 194,286 6,212 3 Cash and cash equivalents 145,003 95,798 49,205 51 Non-current assets held for sale 7,376 0 7,376 - Total assets 2,165,926 2,026,285 139,641 7

Table 24. Structure of the Group’s equity and liabilities Item 2017 2016 change % change Equity 1,121,764 1,038,109 83,655 8 Non-current liabilities, including: 417,123 422,195 -5,072 -1 Borrowings 260,427 290,562 -30,135 -10 Other financial liabilities 7,128 5,887 1,241 21 Employee benefit obligations 62,347 65,378 -3,031 -5 Other obligations 3,016 250 2,766 1106 Provisions 58,054 42,412 15,642 37 Grants 26,109 17,706 8,403 47 Deferred tax liability 42 0 42 - Current liabilities, including: 627,039 565,981 61,058 11 Borrowings 117,705 74,913 42,792 57 Other financial liabilities 1,673 3,033 -1,360 -45 Employee benefit obligations 8,488 9,409 -921 -10

Current tax liabilities 347 9,956 -9,609 -97

Trade and other payables 488,536 457,341 31,195 7 Provisions 8,107 9,849 -1,742 -18 Grants 2,063 1,480 583 39

Liabilities directly related to assets held for sale 120 0 120 -

Total liabilities 1,044,162 988,176 55,986 6 Total equity and liabilities 2,165,926 2,026,285 139,641 7

Significant changes in the Group’s equity and liabilities in the reporting period: • an 8% (PLN 83,655 thousand) year-on-year increase in the Group’s equity, mainly on retained earnings recognised at the end of 2017, • an 11% (PLN 61,058 thousand) year-on-year increase in current liabilities, resulting from an increase in current liabilities under borrowings by 57% (PLN 42,792 thousand) and in trade and other payables by 7% (PLN 31,195 thousand), • a slight (1% or PLN 5,072 thousand) year-on-year decrease in non-current liabilities, mainly on a 10% (PLN 30,135 thousand) decrease in liabilities under borrowings.

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 36 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

Table 25. Structure of the Parent’s assets Item 2017 2016 change % change Non-current assets, including: 1,615,800 1,512,470 103,330 7 Property, plant and equipment 1,321,376 1,227,480 93,896 8 Usufruct of land 5,519 3,536 1,983 56 Intangible assets 22,173 21,891 282 1 Investment property 26,960 25,901 1,059 4 Shares 208,486 186,376 22,110 12 Other receivables 513 3,321 -2,808 -85 Deferred tax assets 30,773 43,965 -13,192 -30 Current assets, including: 557,689 488,458 69,231 14 Inventories 251,942 233,318 18,624 8 Property rights 32,223 37,993 -5,770 -15 Derivative financial instruments 0 2,189 -2,189 -100 Other financial assets 0 10,812 -10,812 -100 Current tax assets 828 0 828 - Trade and other receivables 188,640 164,207 24,433 15 Cash and cash equivalents 69,338 39,939 29,399 74 Non-current assets held for sale 14,718 0 14,718 - Total assets 2,173,489 2,000,928 172,561 9

In 2017, the Company’s assets were PLN 2,173,489 thousand, having increased by 9% on the end of 2016. As at December 31st 2017, non-current assets were PLN 1,615,800 thousand, and current assets were PLN 557,689 thousand. Year on year, the most significant movements in the Company’s assets in 2017 included: • an 8% (PLN 93,896 thousand) increase in property, plant and equipment, attributable to the completion of new investment projects, • a 74% (PLN 29,399 thousand) increase in cash and cash equivalents in bank accounts, • a 15% (PLN 24,433 thousand) increase in trade and other receivables due to higher sales volume for the Parent’s products, • a 12% (PLN 22,110 thousand) increase in shares, mainly attributable to the acquisition of financial assets of PLN 29,179 thousand in PDH Polska S.A., an investment company, • reclassification of the assets of the subsidiary Supra Agrochemia Sp. z o.o. to Non-current assets held for sale, as the sale of the company remains highly probable, • a PLN 10,812 thousand decrease in the Company’s other financial assets, due to the reclassification of a loan granted to the subsidiary Supra Agrochemia Sp. z o.o. to Non-current assets held for sale, • a PLN 2,189 thousand decrease in derivative financial instruments due to the Company’s settlement of futures for the purchase of CO2 emission allowances.

Significant changes in the Company’s equity and liabilities in the reporting period: • a 10% (PLN 102,005 thousand) increase in equity, attributable to the profit earned in 2017, • a 14% (PLN 77,275 thousand) year-on-year increase in current liabilities, resulting from an 11% (PLN 46,450 thousand) increase in trade and other payables and a 57% (PLN 42,791 thousand) increase in liabilities under borrowings, • an 18% (PLN 21,367 thousand) increase in long-term provisions, caused mainly by the recognition of a PLN 9,372 thousand provision for surety securing credit facilities granted to AFRIG S.A. and a PLN 15,831 thousand increase in provisions for environmental protection, including site restoration, • a 17% (PLN 35,395 thousand) decrease in non-current liabilities under borrowings.

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 37 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

Table 26. Structure of the Parent’s equity and liabilities Item 2017 2016 change % change Equity 1,161,629 1,059,624 102,005 10 Non-current liabilities, including: 396,153 402,872 -6,719 -2 Borrowings 178,495 213,890 -35,395 -17 Other financial liabilities 2,920 3,544 -624 -18 Employee benefit obligations 50,438 53,350 -2,912 -5 Other obligations 296 250 46 18 Provisions 139,803 118,436 21,367 18 Grants 24,201 13,402 10,799 81 Current liabilities, including: 615,707 538,432 77,275 14 Borrowings 117,704 74,913 42,791 57 Other financial liabilities 895 1,791 -896 -50 Employee benefit obligations 6,548 6,988 -440 -6 Trade and other payables 480,888 434,438 46,450 11 Provisions 7,609 9,450 -1,841 -19 Grants 2,063 1,301 762 59

Current tax liabilities 0 9,551 -9,551 -100

Total liabilities 1,011,860 941,304 70,556 7 Total equity and liabilities 2,173,489 2,000,928 172,561 9

5.3.4. Financial ratios In 2017, financial results were significantly higher than in 2016, both at the Group and the Parent, which was reflected in higher values of all presented profitability ratios. The asset and equity ratios improved significantly as earnings grew at a faster rate than assets and equity. The Group’s ROCE increased on higher EBIT in 2017. Table 27. Profitability ratios Grupa Azoty POLICE Parent Ratio Group 2017 2016 2017 2016 Gross profit margin 18% 17% 18% 16% EBIT margin 5% 3% 7% 5% EBITDA margin 9% 7% 11% 8% Net profit margin 3% 2% 5% 3% ROA 4% 2% 6% 3% ROCE 8% 5% 11% 8% ROE 8% 4% 11% 6% Return on non-current assets 6% 3% 8% 4% 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/TALCL, i.e. 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 2017, the liquidity ratios were similar to those reported in 2016, and reflected the Group’s and the Parent’s safe liquidity positions.

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 38 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

Table 28. Liquidity ratios Grupa Azoty POLICE Parent Ratio Group 2017 2016 2017 2016 Current ratio 1.0 1.0 0.9 0.9 Quick ratio 0.6 0.6 0.5 0.5 Cash ratio 0.2 0.2 0.1 0.1 Ratio formulas: Current ratio = current assets / current liabilities Quick ratio = (current assets - inventories - current prepayments and accrued income) / current liabilities Cash ratio = (cash + other financial assets) / current liabilities.

Operating efficiency Compared with 2016, there were no significant changes in inventory turnover and the average collection period. At the Parent, the average payment period extended by three days, mainly due to a 11% increase in trade payables. Similar trends were also observed at the Group level. Table 29. Operational efficiency ratios Grupa Azoty POLICE Parent Ratio Group 2017 2016 2017 2016 Inventory turnover period (days) 43 42 43 42 Average collection period (days) 28 29 26 25 Average payment period (days) 83 82 81 78 Cash conversion cycle -12 -11 -12 -11

Ratio formulas: Inventory turnover in days = (inventory * 360) / cost of sales Average collection period in days = (trade and other receivables * 360) / revenue Average payment period in days = (trade and other payables * 360) / cost of sales Cash conversion cycle = inventory turnover in days + average collection period in days - average payment period in days

Debt The total debt ratio in 2017 did changed significantly year on year. There was a decrease in the long-term debt ratio, mainly due to lower non-current liabilities. The short-term debt ratio was slightly above its 2016 value. The equity to debt ratio increased as equity grew faster (by 8%) than liabilities (by 6%). In 2017, the Group’s and the Parent’s debt ratios were safe. Table 30. Debt ratios Grupa Azoty POLICE Parent Ratio Group 2017 2016 2017 2016 Total debt ratio 48% 49% 47% 47% Long-term debt ratio 19% 21% 18% 20% Short-term debt ratio 29% 28% 28% 27% Equity-to-debt ratio 107% 105% 115% 113% Interest cover ratio 1,002% 688% 1,536% 946%

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

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 39 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

Short-term debt ratio = current liabilities / total assets Equity-to-debt ratio = equity / current and non-current liabilities Interest cover ratio = (EBIT + interest expense) / interest expense 5.4. Management of capital and assets In the reporting period, the financial results of the Group were closely correlated with the market environment. This correlation, still observed and confirmed on the market, remains beyond the 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. 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 2017, there were no events of default, whether relating to timely payment of liabilities or other conditions, that could result in acceleration of debt. 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, in April 2015, 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., Grupa Azoty Zakłady Azotowe Kędzierzyn S.A., and the Company. 5.5. Bank deposits The Parent uses PLN-denominated overdraft facilities. Surplus cash is placed on PLN, USD and EUR overnight deposits under separate agreements. The Parent had no bank deposits as at December 31st 2017. 5.6. 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 31. The Group’s liabilities under bank loans as at December 31st 2017* Bank Amount Utilisation Available Limit Currency Type of instrument drawn (%) amount PKO BP S.A. Multi-purpose credit facility limit 52,000 10,664 PLN 21 41,336

PKO BP S.A. 208,900 105,200 PLN 50 103,700 Overdraft facility BGK S.A. 80,000 3,723 PLN 5 76,277 Overdraft facility BGŻ BNP Paribas S.A. multi- 22,000 19,710 EUR 90 2,290 purpose credit facility

* In nominal terms.

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 40 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

The Parent also uses a multi-purpose credit facility of PLN 52,000 thousand under an agreement with PKO BP S.A. As at December 31st 2017, no amount was outstanding under the working capital facility, while PLN 10,664 thousand was used for guarantees and a stand-by letter of credit. The remaining amount, of PLN 41,336 thousand, remains to be used for further guarantees, letters of credit and as a working capital facility. The agreement expires on September 30th 2019. The Parent and its subsidiaries use an overdraft facility under an agreement between Grupa Azoty S.A. and PKO BP S.A., supported by an additional physical cash pooling service. The available limit is PLN 208,900 thousand. The overdraft facility agreement expires on September 30th 2019. The limit available to the Parent is PLN 200,500 thousand and consists of a credit limit (PLN 110,500 thousand) and the Daily Limit available as part of real cash pooling (PLN 90,000 thousand). As at December 31st 2017, the amount of debt outstanding under the agreement was PLN 105,200 thousand. Within the same credit facility, the following limits are available to the subsidiaries: • Grupa Azoty POLICE Serwis Sp. z o.o. PLN 8,000 thousand, • Koncept Sp. z o.o. PLN 200 thousand, • Transtech Sp. z o.o. PLN 100 thousand, • Zarząd Morskiego Portu Police Sp. z o.o. PLN 100 thousand. As at December 31st 2017, none of the subsidiaries had any overdraft debt outstanding at PKO BP S.A. In January 2017, the Parent executed a PLN 80,000 thousand overdraft facility agreement with Bank Gospodarstwa Krajowego. The agreement was entered into a period of 36 months. As at December 31st 2017, the amount of debt outstanding under the agreement was PLN 3,723 thousand. In February 2014, the Parent and the subsidiary African Investment Group S.A. entered into a multi- purpose credit facility agreement with BGŻ BNP Paribas Bank Polska S.A. to finance the subsidiary’s day-to-day operations. The limit under the agreement is EUR 22,000 thousand, of which EUR 19,710 thousand was used as at December 31st 2017. The limit is available until February 17th 2019. On February 7th 2017 the Company’s Management Board decided to recognise a provision for the surety securing the credit facilities granted to African Investment Group S.A. in the amount equal to the facility amounts drawn in each year.

Table 32. The Group’s liabilities under borrowings from related parties as at December 31st 2017* Related party/ Currenc Available Amount Amount drawn Utilisation (%) Type of liability y amount

Grupa Azoty S.A. 104,000 32,000 PLN 31 26,000 Investment loan

Grupa Azoty S.A. Loan for payment towards 60,000 20,000 PLN 33 40,000 PDH Polska S.A. share capital * In nominal terms.

The Parent uses a loan to finance its capital expenditure, advanced by Grupa Azoty S.A. under the intragroup financing agreement of April 23rd 2015. A PLN 104,000 thousand loan was advanced on September 14th 2015. As at December 31st 2017, the amount outstanding under the agreement was PLN 32,000 thousand. The last tranche of the loan, of PLN 26,000 thousand, is expected to be disbursed in 2018. On September 14th 2015, Grupa Azoty S.A. advanced to the Company a PLN 60,000 thousand loan to finance the share capital of the new subsidiary PDH Polska Spółka Akcyjna, under the intragroup financing agreement of April 23rd 2015. The loan is disbursed in tranches. As at December 31st 2017, the outstanding loan amount was PLN 20,000 thousand. The remaining amount of the loan may be drawn down in 2018.

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Table 33. Group’s liabilities under non-bank borrowings as at December 31st 2017* Co-financing institution/ Curren Used Amount Amount drawn cy % Project Regional Fund for Environmental Protection and Water Management in Szczecin 90,000 56,250 PLN 100 Exhaust gas treatment unit and upgrade of EC II CHP plant

National Fund for Environmental Protection 90,000 80,355 PLN 100 and Water Management in Szczecin Upgrade of ammonia synthesis process * In nominal terms.

The Company has a 10-year PLN 90,000 thousand loan obtained from the Regional Fund for Environmental Protection and Water Management in Szczecin, to finance the project ‘Emissions treatment unit and upgrade of the EC II CHP plant at Zakłady Chemiczne Police S.A.’. The loan was disbursed in full. The loan is scheduled for repayment by December 31st 2022. As at December 31st 2017, the amount outstanding under the agreement was PLN 56,250 thousand. A 10-year PLN 90,000 thousand loan from the Regional Fund for Environmental Protection and Water Management in Warsaw, to finance the project ‘Upgrade of ammonia synthesis process at Zakłady Chemiczne Police S.A.’ The entire amount of the loan was disbursed. The loan agreement expires on December 20th 2023. As at December 31st 2017, the amount outstanding under the agreement was PLN 80,355 thousand.

Borrowing agreements concluded or terminated during the financial year In January 2017, the Parent executed a PLN 80,000 thousand overdraft facility agreement with Bank Gospodarstwa Krajowego, bearing interest at 1M WIBOR plus margin. As at December 31st 2017, the amount of debt outstanding under the agreement was PLN 3,723 thousand. The agreement expires on January 24th 2020. Table 34. Material financing agreements entered into or amended in 2017 and by the date of this Report Agreement Amendment Currency Amount Maturity date date Overdraft facility Jan 25 2017 PLN 80,000 Jan 24 2020 agreement with bank BGK

In January 2017, the Parent executed a PLN 80,000 thousand overdraft facility agreement with Bank Gospodarstwa Krajowego, bearing interest at 1M WIBOR plus margin. As at December 31st 2017, the amount of debt outstanding under the agreement was PLN 3,723 thousand. The agreement expires on January 24th 2020.

5.7. Loans advanced Loans advanced to the Group’s related entities The Parent granted to the following loans 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 December 31st 2017, the amount outstanding under the loan was PLN 3,600 thousand. The loan is to be repaid by June 30th 2018. • a PLN 10,000 thousand loan to finance the subsidiary’s capital expenditure, advanced on December 31st 2014. In the 12 months ended December 31st 2017, the Parent disbursed four tranches of the loan for a total amount of PLN 1,013 thousand. As at December 31st 2017, the

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amount outstanding under the loan was PLN 9,650 thousand. The loan is to be repaid by June 30th 2018.

5.8. Sureties and guarantees received and issued Sureties for credit facilities Table 35 Sureties provided by the Parent as at December 31st 2017 Type/ Beneficiary Details Currency Date Amount Issuer Surety for Grupa Azoty Revolving credit syndicated credit PLN Apr 23 2015 600,000 S.A. facility agreement facility Surety for PKO BP Grupa Azoty Overdraft facility credit facility PLN Sep 20 2016 124,000 S.A. agreement (overdraft) Surety for PKO BP Grupa Azoty Multi-purpose credit credit facility PLN Sep 20 2016 96,000 S.A. facility agreement (MPCF) Guarantee of Grupa Azoty Credit facility repayment of EIB PLN May 28 2015 220,000 S.A. agreement credit facility Guarantee of Grupa Azoty Credit facility repayment of EBRD PLN May 28 2015 60,000 S.A. agreement credit facility 1,100,000

On January 25th 2018, a guarantee agreement was concluded between Grupa Azoty S.A. and the European Investment Bank (“EIB”) of Luxembourg. The agreement was concluded between the EIB and the key subsidiaries of Grupa Azoty S.A., including the Company, Grupa Azoty Zakłady Azotowe Puławy S.A. and Grupa Azoty Zakłady Azotowe Kędzierzyn S.A., acting as guarantors.30 The guarantee was provided to secure repayment of up to EUR 145,000 thousand under the loan agreement (“EIB Agreement”), which is an integral part of Grupa Azoty’s long-term financing package used to fund the Group’s general corporate needs, including strategy implementation and investments, as well as research and development. The maximum amount of the guarantee provided by each of the guarantors, including the Company, was agreed at EUR 58,000 thousand, i.e. the aggregate amount of the guarantee is EUR 174,000 thousand. Each guarantor is severally liable for the Borrower’s obligations up to its agreed maximum liability (guarantee amount). If the Borrower fails to satisfy its obligations under the EIB Agreement, the EIB may seek payment of any outstanding amounts by the guarantors. The guarantee expires on the expiry of the security term, ending on the repayment of debt under the EIB Agreement (concluded for a period of ten years starting from disbursement), to be repaid in instalments, starting within three years of the disbursement. 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. In 2017, the Parent neither issued nor amended any guarantees whose total amount would exceed 10% of the Parent’s equity.

Table 36. Guarantees provided in 2017 Type and parties Date Security for Amount Expires on Bank guarantee procured by Nov 30 2017 Fuel gas 3,522 Nov 30 2018

30 For details, see Current Report No. 2/2018, of January 29th 2018.

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Type and parties Date Security for Amount Expires on the Company for GAZ-SYSTEM transmission S.A. agreement Insurance guarantee procured by Grupa Azoty Police Serwis Sp. z o.o. for Zakład Odzysku i Składowania Odpadów Sep 5 2017 Warranty bond 11 May 13 2019 Komunalnych (Municipal Waste Recycling and Landfilling Company) Insurance guarantee procured by Grupa Azoty Police Serwis Sp. z o.o. for Zakład Odzysku i Składowania Odpadów Sep 5 2017 Warranty bond 2 Jun 12 2019 Komunalnych (Municipal Waste Recycling and Landfilling Company)

Table 37. Guarantees amended in 2017 Type and parties Date Security for Amount Expires on Electricity Bank guarantee procured by Dec 31 Mar 17 2017 transmission 1,300 the Company for PSE S.A. 2017 agreement Bank guarantee procured by Customs debt May 22 the Company for the Szczecin Mar 24 2017 1 000* payment guarantee 2018 Tax Administration Chamber Electricity Bank guarantee procured by Dec 31 Nov 15 2017 transmission 1,300 the Company for PSE S.A. 2019 agreement 4,526 Letter of credit procured by Contract payment Dec 30 Dec 28 2017 (USD 1,300 the Company for MET guarantee 2018 thousand)

*On May 22nd 2017, under an annex the amount of the guarantee was reduced from PLN 4,000 thousand to PLN 1,000 thousand.

Letters of credit issued In 2017, the Company did not have any letters of credit issued. 5.9. Material off-balance-sheet items Promissory notes As at December 31st 2017, there was only one valid blank promissory note at the Company, issued as security for the PLN 90,000 thousand loan advanced by the National Fund for Environmental Protection and Water Management of Warsaw as co-financing for the investment project ‘Upgrade of the ammonia synthesis process at Zakłady Chemiczne Police S.A.’ Blank promissory notes issued by the Company and guarantees issued by banks upon instructions from the Company as security for liabilities recognised in the statement of financial position or liabilities with respect to which the likelihood of cash outflows to settle the liability is very low are not presented as contingent liabilities. 5.10. Financial instruments As part of its financial risk management policy, the Company identifies the following risks and has adopted the following risk management objectives and methods: Currency and interest rate risk management The Company manages currency and interest rate risk in line with the ‘Financial (Currency and Interest Rate) Risk Management Policy’, which was adopted in 2015 as an element of the Grupa

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Azoty Group’s centralised Financing Model to be applied by those members of the Group which are exposed to material currency and interest rate risks. In accordance with the policy, the objective of currency risk management at the Company is to reduce the impact of adverse exchange rate movements on the Company’s cash flows to a level acceptable by the Company, determined in accordance with the VaR methodology. The objective of interest rate risk management is to optimise interest rates with a view to minimising the cost of interest on debt and improving profitability of financial assets. The Parent is exposed to currency risk resulting from its net exposure to the euro and the US dollar related to the foreign currency balance of its sale and procurement transactions, trade receivables and payables, as well as receivables and liabilities from financing and investing activities. The Company is also exposed to the risk of temporary strong exchange rate volatility, including the effect of EUR/USD exchange rate development on the EUR/PLN and USD/PLN exchange rates. The exposure to interest rate risk arises from the Company’s holding of financial liabilities, i.e. borrowings denominated in the złoty, which are based on variable market interest rates. In 2017, given its operating environment, the Company did not use any financial instruments to hedge currency or interest rate risk. To mitigate currency risk and interest rates, the Company used natural hedging, i.e. • offsetting of income and expenses denominated in a foreign currency to minimise the effect of exchange rate fluctuations on its financial result; and • using the same reference rate for PLN-denominated borrowings and financial assets. Price risk management In 2017, the Company did not use any hedging instruments to hedge against feedstock or product price fluctuations. Credit risk management The credit risk management policy applies to and is applied by all of the Company’s divisions and organisational units which enter into commercial or financial transactions. The policy, which lays down the rules for managing risk arising from trade credit granted by the Company, comprises: • risk identification and assessment, • definition of risk management strategy, • selecting risk management measures, • implementing the adopted strategy, • monitoring and evaluating the effects of the measures taken. Receivables insurance agreements In the third quarter of 2017, a tender procedure was conducted to select an insurance provider to insure trade receivables arising from sales of fertilizers, pigments, chemicals and potassium chloride. Following evaluation of the financial and other terms of the received offers, Atradius Credito Caucion S.A. de Sequros y Reaseguros S.A. Oddział w Polsce was selected as the best bidder, and on December 16th 2017 three policies were signed to cover trade receivables denominated in three currencies, i.e. PLN, EUR and USD. 5.11. Expected financial condition Despite strong exposure to developments in the market environment, the Parent as well as the other Group members are fully solvent, with good credit standing. During the reporting period, the Parent identified no risks to its financial liquidity. The financial liquidity is one of the key areas constantly monitored by the Group. 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. The Company operates an active cash flow (payables and receivables) management policy by using trade credit and advance payment in the settlement of sale transactions and by extending payment terms in purchase transactions. The Parent, as a Key Company of the Grupa Azoty Group, is party to umbrella overdraft facility agreements and multi-purpose facility agreements to secure funding for day-to-day operations, and to New Financing Agreements, which include long-term agreements for the financing of the Strategy and Development Plan. The Parent complies with the uniform covenants of its facility agreements which enable it to significantly increase financial debt when and as needed.

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6. Risk, threats and growth prospects Given the Company’s position within the Group, factors material to the Parent’s growth are the factors which affect the development and growth of the entire Group. Thus, the Group’s risks, threats and growth prospects are analysed chiefly from the perspective of the Parent’s own growth prospects. 6.1. Significant risk factors and threats 6.1.1. 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 the existing units, and reducing production costs of key products. A number of the existing units will be upgraded in the coming years, to bring the facilities into compliance with applicable legal requirements, such as the IED Directive. 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 and units responsible for their execution. If a project is not properly prepared or unexpected circumstances arise, the Company also risks incurring additional capital expenditure during its execution. Risks may also arise from raising the requirements which must be satisfied by contractors/subcontractors, as this may involve higher contract costs and may result in the lower number of potential contractors holding the desired licences. On the other hand, more stringent requirements translate into improved OHS standards and higher quality of provided services. The success of strategic projects is contingent on many external and internal factors. The main external factors affecting the Company’s growth opportunities and growth rate include macroeconomic factors, market situation, economic environment, and the activities of main competitors. They could adversely affect the Company’s and the Grupa Azoty Group’s ability to develop its business as planned and to deliver its strategic objectives. They, however, remain largely beyond the Company’s control. Major internal factors and efforts relevant to the Company’s and the Grupa Azoty Group’s growth include the technical condition of production units and organisational preparedness to follow the investment programme. 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. In order to minimise the risks to the execution of strategic projects at the Company and the Grupa Azoty Group, internal procedures have been put in place to define and govern the preparation and execution of investment projects. Specific controls are required for contractors, their credentials and experience, as well as proper and timely performance of work. The internal control system helps to mitigate any mismanagement risk and find opportunities for savings. 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 has been introduced across the entire Grupa Azoty Group. The risk assessment procedure involves two aspects of key importance

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 46 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) for the implementation of strategic projects: their budgets and completion deadlines. Risk indicators for strategic projects are monitored on a regular basis and reported quarterly. In 2017, seven strategic projects were monitored. 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 stricter regulatory requirements regarding heavy metal content in the Company’s products/acceptable quality parameters 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. On December 20th 2017, the EU Council adopted a position on the cadmium limit 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. 6.1.2. 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

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 47 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) production units or incorrect methods of assessing the technical condition (technical condition assessment which does not comprehensively addresses specific conditions of manning and operating technical facilities). 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 mitigate their consequences. The well-trained Company Fire Brigade, with additional support from chemical rescue teams and other services, is capable of undertaking effective rescue operations in any situation. The correctness of work safety solutions in place at the Company is assessed by external inspection authorities and accreditation/certification bodies. The Company’s 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 2017.

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

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 48 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) year deadline. Such a derogation may be granted because the costs of complying with the emission limits are disproportionate to the environmental benefits. To ensure compliance with the regulations, the Company has taken risk management measures including a number of control mechanisms, such as internal procedures, technological and workplace-specific instructions, continuous monitoring of emissions, internal control, training, and execution of projects to adapt process units to the new legal requirements. In order to limit the risk of excess emissions, an investment project is carried out at the CHP II plant designed to reduce NO2 , SOx and particulate matter emissions (FGD project). As part of risk management, ongoing monitoring and monthly reports are provided to ensure that the project schedule and 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 draft Water Law Act provided for an increase in water consumption fees, including for industry- related consumption. It set out flat and variable fees for water withdrawal and waste water discharge. If legislated, this would result in a substantial increase in water withdrawal and waste water discharge fees paid by the Company. The Company actively participated in the consultations of the draft law, objecting to the imposition of withdrawal fees in respect of internal seawater. The Company’s position was taken into account in the final draft Water Law Act by adding the provision reading ‘internal seawater withdrawal is exempt from water service provision 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 wastewater treatment plants, the Company was called to apply for amendment to the permit by December 2nd 2017. The application was submitted to the Marshal Office on December 1st 2017. On December 15th 2017, the Company’s integrated permit was amended to the full extent requested by the Company. The Company achieved a derogation concerning the monitoring frequency for treated wastewater. The Company must ensure full compliance with the requirements of the conclusions by May 2020. On August 17th 2017, BAT conclusions for large combustion plants (LCP) were announced; the conclusions apply to the CHP II plant. The Company must adapt the plant to the new requirements within four years as of the conclusions announcement date. 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. 6.1.3. Comprehensive customer support Risk of higher fertilizer 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. Measures taken by the Company to strengthen its competitive advantages in the fertilizers segment:

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• 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, are planning to increase their production capacities. Because of these factors, the prices of and demand for the Company’s products fluctuate. The risks related to fertilizer production include the following factors: • demand-supply imbalance caused by lower consumption of products (changeable weather conditions, delayed disbursements of direct payments, market saturation and oversupply of products), • lower volumes of purchases by customers who need to scale down their own output and cope with uncertainties surrounding their ability to sell their own products, • delays in disbursements of direct payments to farmers, • natural disasters, droughts, floods, or frosts leading to lower purchases of fertilizers. The key risks related to titanium white include: • 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 importers 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. The Company may be able to increase its sales volumes given the shortages of titanium white caused by the difficulty in resuming production experienced 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. Uncertainty risk is related to the following factors:

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• the tightening of EU laws pertaining to heavy metal content, restricting the use of the Company’s products by customers in the EU countries, • restrictions on the quantity of fertilizers used per hectare, • introduction/application of restrictions on the quantity of components in products following the amendments to the relevant regulation, • liberalisation of trade in the EU, • meeting fertilizer granulation requirements, • risk of slowing demand from end customers (the cement industry) for iron sulfate in the form offered by the Company as demand for the product in the granular form grows. The Company monitors changes in all types of legal regulations the tightening of which may lead to the limitation of product sales, and coordinates support and lobbying activities at EU institutions. The Company also cooperates with other manufacturers in order to reach a strong, common position with regard to proposed restrictions. Examples include cooperation with the AEEP (the new fertilizer regulation) or the TDIC (titanium white classification). 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. 6.1.4. Availability of feedstock and materials Risk related to maintaining continuity of ammonia production / ammonia availability Key risks that may affect the continuity of ammonia production and availability are both internal and external. The external factors, which are beyond the Company’s control, include price fluctuations on the local and global markets, economic environment, political factors governing the availability of transmission pipelines and, as a result, disruptions in the supply of natural gas (the key feedstock), as well as the level of demand largely affected by the economic environment. Higher prices of gas, which is a significant cost component, and a force majeure event, which may reduce or interrupt gas supplies, are also among potential risk factors. In the event of a temporary decrease in utilisation of the ammonia units’ capacity, imprecise specification of the required amounts of ammonia may result in contracted volumes being uncollected. However, the risks are offset by opportunities, such as lower gas consumption per tonne of ammonia, which translates into lower amounts of gas consumed by the Company. The internal factors include technological constraints, such as the type and structure of equipment, complexity, nature of emergency repair works, availability of the specialist maintenance team and spare parts. The Company has undertaken a number of initiatives to ensure reliable operation of the unit and maximum availability of machinery and equipment, including: • implementation of the TPL programme and Preventive Maintenance programmes, supported by the CMMS system, and planned management of plant maintenance, which will significantly enhance the technical condition and reliability of the units, thereby minimising the risk of failures; • upgrade of the ammonia unit, chiefly to reduce energy-intensity that will bring savings in key feedstocks and utilities; • optimisation of the ammonia production process, manifested in effective management of the stream of production with appropriate selection of operating parameters for machinery and equipment, which results in maximum capacity utilisation and achievement of target production volumes. The risk management strategy for maintaining continuity of ammonia production and availability is focused on risk mitigation, achieved through harnessing of synergies. 6.1.5. 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 is acquired with the use of futures contracts, i.e. purchase of emission allowances in the

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 51 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) 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. If, as required, no allowances are purchased for redemption in the year, emissions for 2017 may be settled with some of the free allowances that will be credited in the units’ accounts by the end of the first quarter of 2018. 6.2. Grupa Azoty Group’s significant external and internal growth factors 6.2.1. External factors Market factors The strongest drivers of the Company’s situation are those related to market prices of the Company’s products and purchase prices of raw materials/feedstocks with the greatest effect on production costs, including mainly natural gas, phosphate rock, and potassium chloride. The relationship between market prices of products and prices of the key feedstocks has a bearing on the Company’s competitive position and profitability. External material drivers of the demand for fertilizers include the macroeconomic climate for the agricultural sector and farmers’ incomes. The situation in agricultural is largely affected by the relationship between prices of agricultural produce and prices of means of agricultural production. The Company’s results also depend on conditions prevailing in the main sectors which purchase the Company’s products and on the markets where those sectors sell their products.

Legislative changes The Company’s development directions depend on legislative regulations, primarily those implemented by the European Union as European countries are a strategic market for the Company. Legislative changes will affect the Company’s business in two ways. On the one hand, the need for compliance will determine changes and solutions implemented by the Company. On the other hand, legal regulations binding on the Company’s customers and users of its products will affect demand. Given the major share of the Fertilizers Segment in the Company’s revenue, all developments in the agricultural market translating into demand changes have a significant effect on the Company’s market situation, development (changes in product mix) and sales (sales policy and structure). Work is under way to enact a new EU fertilizer regulation which would be in all EU member states. The new legislation would impose more stringent limits for the content of cadmium and other contaminants in phosphate and compound fertilizers. At the present stage of work, as part of the trialogue between the European Commission, the European Parliament and the EU Council, discussions are held to reach the final agreement on the target limits for the content of cadmium in fertilizers and the transitional periods leading to their full implementation, including the transitional period for taking adaptive measures to allow manufacturers to meet the new requirements. The changed environmental regulations will require unit operators to adapt their units to the new emission standards. The legislative changes currently under way will in the coming years have a major impact on the Company’s environment and its operation in the market reality. 6.2.2. Internal factors Liquidity and debt Ability to earn positive margins on the main products marketed both on the domestic and international markets remains the key factor which has a bearing on the Company’s current liquidity in the long-term. The Company operates an active cash flow (payables and receivables) management policy by using trade credit and advance payment in the settlement of sale transactions, extending payment terms in purchase transactions, and insuring its trade receivables. The Company manages its liquidity by maintaining credit facilities appropriate for the scale of its business, which constitute a liquidity reserve minimising the risk of potential effects of delayed payment of liabilities.

Intensification of sales Apart from the achievement of marketing objectives, another important function of the sales policy is to maximise the Company’s sale volumes through full optimisation of the available production

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Quality The Company’s products are manufactured using globally recognised technologies and the final quality of its products meets the requirements of the Company’s customers on target markets. The Company constantly improves production efficiency through the introduction of state-of-the-art systems supporting proper process monitoring and control. The Company holds Quality, Environment and Security Management System Certificates, which guarantee stable quality of its products. The development of new production technologies has enabled the Company to expand its product offering to include new types of fertilizers which help find customers on global markets that previously were beyond the Company’s reach. The following brands owned by the Company are well-known and recognised on the market as symbols of high quality: • POLIFOSKA® − the leading brand on the Polish market of compound NPK fertilizers. It encompasses over ten different types of fertilizers with different chemical compositions and application properties. The POLIFOSKA® brand has become a synonym of compound fertilizers in Poland. The product features a high concentration of pure constituents, chemical uniformity of fertilizer grains, high assimilability of constituents, optimal granulation and application characteristics, as well as favourable price per nutrient equivalent; • Apart from POLIFOSKA®, the Company also offers a diammonium phosphate (NP 18-46) fertilizer marketed as POLIDAP®, and a low-chloride compound fertilizer under the brand name of POLIMAG® S; • TYTANPOL® − the Company is the only manufacturer and largest supplier of titanium pigments on the Polish market. TYTANPOL® titanium white produced by the Company is well known for its high pigmentation properties. All varieties of titanium white offered by the Company are of high quality, feature high opacifying and brightening properties, and are stable, easily dispersible, intercompatible and non-toxic.

7. Equity and other securities and its major shareholders 7.1. Total number and par value of Company shares, holdings of Company shares by supervisory and management personnel, and interests of such persons in the Company’s related entities Number and par value of Company shares: • 60,000,000 Series A shares with a par value of PLN 10 per share, • 15,000,000 Series B shares with a par value of PLN 10 per share, The total number of Company shares is 75,000,000 ordinary bearer shares (code PLZCPLC00036). Table 38. Shares held by management personnel Number of shares / voting rights As at As at As at

Jan 1 2017 Dec 31 2017 date of this Report Wojciech Wardacki, Ph.D. - - - Włodzimierz Zasadzki, Ph.D. - - - Tomasz Panas - - - Anna Tarocińska* 1 1 1

* Since March 3rd 2017. On March 3rd 2017, the Company’s Supervisory Board changed the composition of the Management Board. For details, see Current Report No. 10/2017 of March 3rd 2017 and Current Report No. 11/2017 of March 3rd 2017. As at December 31st 2017 and as at the date of this Report, none of the members of the Parent’s Supervisory Board held any shares in the Parent’s share capital.

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As at the date of this Report, none of the Parent’s supervisory or management personnel held any shares in the Parent’s related parties. 7.2. Treasury shares held by the Parent, Group companies and persons acting on their behalf The Parent holds no treasury shares. The Group companies hold no treasury shares, 7.3. Shares of the Parent The Company shares were listed on the Warsaw Stock Exchange for the first time on July 14th 2005. The shares (ticker: PCE) are listed on the WSE main market in the continuous trading system and are included in the WIG and sWIG80 indices and the chemical sector index, WIG-Chemia.

Share performance The Company stock price started the year at PLN 22.80, rising slightly during the first quarter, to PLN 23.60, which later proved to be the 2017 high. In January and February, the stock price fell to PLN 20.10. In March, the shares traded between PLN 21.15 and PLN 20.02. Table 39. Stock performance Since IPO 2016 2017

Historical high 30.00 27.35 23.60 Historical low 4.20 19.51 19.99 Average price 14.88 22.57 20.97 Average trading volume 71,746 2,213 1,805

Throughout the second quarter, the price was relatively stable within the PLN 19.99−20.70 range. During the third quarter, the price slowly moved up, to reach a high of PLN 21.22. It remained stable at around PLN 21 throughout the fourth quarter, and ended the year at PLN 20.84. Figure 13. Share performance in 2017 25,00 23,00 21,00 19,00 17,00 15,00 01 2017 02 2017 03 2017 04 2017 05 2017 06 2017 07 2017 08 2017 09 2017 10 2017 11 2017 12 2017

Dividend policy In line with the Strategy of the Grupa Azoty Group for 2013–2020, which was updated in 2017, the guiding principle behind the dividend policy is to make payments proportionate to the Company’s earnings and financial condition. The General Meeting is recommended to resolve on dividend payments representing up to 60% of the Company’s separate net profit for a given financial year. The main goal underpinning the Group’s financing structure is to ensure long-term financial security and internal coherence between all funding sources. Given the extensive capital investment programme in place and the risk of an economic downturn, no floor has been set for the dividend payout ratio. Accordingly, if justified, the Management Board will not recommend a dividend payment. Decisions on dividend payments are made with consideration given to a range of factors concerning the Group, and this includes prospects for its further operations and earnings, cash requirement, financial position, expansion plans and related legal requirements.

Recommendations Table 40. Recommendations concerning the Parent shares issued between January 1st 2016 and the date of this Report Recommend Target price Price on Date Broker ation (PLN) recommend

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ation date (PLN) Jan 23 2018 sell 15.40 19.90 DM BOŚ SA Dec 6 2017 sell 15.40 20.98 DM BOŚ SA Oct 18 2017 hold 20.90 20.85 DM BZ WBK SA Oct 18 2017 hold 21.00 20.85 DM BOŚ SA Jul 28 2017 hold 22.40 21.04 DM BDM SA Jul 5 2017 buy 24.00 20.20 DM BOŚ SA Jul 5 2017 hold 21.30 20.20 PKO IB Apr 26 2017 sell 16.00 20.15 DM BOŚ SA Feb 6 2017 sell 18.60 22.05 DM BOŚ SA

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

8. Statement of compliance with corporate governance standards Acting pursuant to Section 29.5 of the WSE Rules and Resolution No. 1013/2007 of the Management Board of the Warsaw Stock Exchange, the Management Board hereby publishes a report on the Parent’s compliance with the set of corporate governance rules laid down in the “Best Practice for WSE Listed Companies 2016” in 2017. 8.1. Corporate governance code applicable to the Parent and the place where the text of the code is available to the public Observing the highest standards of communication on the capital market and corporate governance principles, in 2017 the Company complied with the ‘Best Practice for WSE Listed Companies 2016’ issued by the Warsaw Stock Exchange. The code effective in 2017 was published as an appendix to Resolution No. 19/1307/2012 of the WSE Supervisory Board, dated November 21st 2012. Following the adoption by the WSE Supervisory Board of Resolution No. 26/1413/2015 of October 13th 2015 approving the new ‘Best Practice for WSE Listed Companies 2016’, the Company states that it complies, as of January 1st 2016, with the recommendations and principles laid down in the new code, published on the WSE’s and the Company’s websites. The Company complies with the recommendations and principles set out in the Code of Best Practice, except for the following: IV.R.2. If justified by the structure of shareholders or expectations of shareholders notified to the company, and if the company is in a position to provide the technical infrastructure necessary for a general meeting to proceed efficiently using electronic communication means, the company should enable its shareholders to participate in a general meeting using such means, in particular through: real-life broadcast of general meetings, real-time bilateral communication where shareholders may take the floor during a general meeting from a location other than the general meeting, exercise of the right to vote during a general meeting either in person or through a proxy.

Explanation: The Company’s Articles of Association and the Rules of Procedure for the Company’s General Meeting do not provide for real-time broadcasting of General Meetings. Also, the Company believes that the way General Meetings have been documented and carried out to date ensures

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I.Z.1.20 A company should operate a corporate website and publish on it, in a legible form and in a separate section, in addition to information required under the legislation, an audio or video recording of a general meeting. Explanation: In the Company’s view, the way General Meetings have been documented and carried out to date ensures transparency and safeguards the rights of all shareholders. Further, information on passed resolutions is published by the Company in the form of current reports, also on its website. Therefore, investors are able to review the matters discussed at General Meetings. The Company may apply this principle in the future. In the opinion of the Company’s Management Board, the decision not to apply the abovementioned principle will not affect the reliability of the Company’s information policy, nor will it hinder shareholders’ participation in General Meetings.

IV.Z.2. If justified by the shareholding structure, a company should ensure publicly available real-time broadcasts of general meetings. Explanation: The Company’s Articles of Association and the Rules of Procedure for the Company’s General Meeting do not provide for real-time broadcasting of General Meetings. Also, the Company believes that the way General Meetings have been documented and carried out to date ensures transparency and safeguards the rights of all shareholders. Further, information on passed resolutions is published by the Company in the form of current reports, also on its website. Therefore, investors are able to review the matters discussed at General Meetings. However, the Company may apply this principle in the future.

In the opinion of the Company’s Management Board, the decision not to apply the abovementioned principle will not affect the reliability of the Company’s information policy, nor will it hinder shareholders’ participation in General Meetings. 8.2. Declaration of applying the recommendations contained in the ‘Best Practice for WSE Listed Companies 2016’

I. Disclosure Policy, Investor Communications I.R.1. Where a company becomes aware that untrue information is disseminated in the media, which significantly affects its evaluation, it should immediately publish on its website a communiqué containing its position on such information, unless in the opinion of the company the nature of such information and the circumstances of its publication give reasons to follow a more adequate solution. The Company declares to make every effort to prevent any damage that may be caused by disseminating untrue information about it. The Company seeks to ensure transparency by responding effectively to untrue information and limiting the negative effects of its dissemination. The Company takes care to provide its shareholders and the market with a true and accurate picture of Grupa Azoty Police. The Company keeps track of how it is covered in electronic media and selected press titles. I.R.2. Where a company pursues sponsorship, charity or other similar activities, it should publish information about the relevant policy in its annual activity report.

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The Company pursues transparent sponsorship, charity and other similar activities. The Company’s sponsorship policy is implemented in line with the Communication Procedure, supplemented by sponsorship policy regulations on November 23rd 2016. I.R.3. Companies should allow investors and analysts to ask questions and receive explanations – subject to prohibitions defined in the applicable legislation – on topics of their interest. This recommendation may be implemented through open meetings with investors and analysts or in other formats allowed by a company. The Company, pursuing an open information policy, provides all market participants, in particular current and prospective shareholders, with exhaustive and reliable information on events taking place at the Company and the Group. I.R.4. Companies should use best efforts, including taking all steps well in advance as necessary to prepare a periodic report, to allow investors to review their financial results as soon as possible after the end of a reporting period. The Company takes all necessary steps to prepare periodic reports well in advance. This Report, as well as all the 2017 periodic reports, were published before the respective deadlines set by the legislator.

II. Management Board, Supervisory Board II.R.1. To ensure the highest standards of the management board and the supervisory board of a company in efficient fulfilment of their obligations, the management board and the supervisory board should have members who represent high qualifications and experience. In 2017, the Management Board and the Supervisory Board were composed of persons holding university degrees in law, economics, chemical engineering, as well as accounting. In addition, most of them have completed postgraduate studies, e.g. in project management, postgraduate MBA programmes or specialist courses and training. II.R.2. Decisions to elect members of the management board or the supervisory board of a company should ensure that the composition of these bodies is comprehensive and diverse among others in terms of gender, education, age and professional experience. Pursuant to Art. 21.3 of the Company’s Articles of Association, a Management Board member should have a university degree and at least five years of professional experience in a managerial position. Given their vast competences and professional experience, including experience in serving on supervisory bodies of chemical or financial companies, members of the Management Board and Supervisory Board manage and supervise the Company’s operations properly and to a sufficient degree. II.R.3. Serving on the management board of a company should be the main area of the professional activity of management board members. Additional professional activities of management board members must not require such amounts of time and effort as would adversely affect the proper performance of the members’ duties and responsibilities at the company. In particular, management board members should not serve in governing bodies of other entities if the time devoted to such service were to prevent the proper performance of their duties and responsibilities at the company. Some members of the Company’s Management Board have additional functions at parent entities. II.R.4. Supervisory board members must be able to devote the time necessary to perform their duties. The Supervisory Board exercises ongoing supervision of the Company’s operations in each area of its activity. Pursuant to Art. 36.1 of the Company’s Articles of Association, the Supervisory Board meetings are held at least once every two months. In 2017, the Supervisory Board met 17 times and held 10 votes by written ballot. II.R.5.

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If a supervisory board member resigns or is unable to perform his or her duties, the company should immediately take steps necessary to ensure substitution or replacement on the supervisory board. If there is a threat that resignation or inability to perform his or her duties by a member of the Supervisory Board may result in a vacancy on the Board, the Company declares to take necessary steps to fill such vacancy. In the event of any temporary vacancy on the Supervisory Board, the Company will report such circumstance as a breach of the principle. Some of the Supervisory Board members are elected by the Company employees, pursuant to Art. 14 of the Act on Commercialisation and Privatisation.

II.R.6. Being aware of the pending expiration of the term of office of management board members and their plans of further performance of duties on the management board, the supervisory board should take steps in advance to ensure efficient operation of the company’s management board. The Company declares to apply this recommendation by ensuring continued operation of the Management Board, and by taking steps, sufficiently in advance, to ensure appropriate operation of the Company. II.R.7. A company should allow its supervisory board to use professional and independent advisory services necessary for the supervisory board to exercise effective supervision in the company. In its selection of the advisory services provider, the Supervisory Board should take into account the financial condition of the Company. Should the need arise, the Company declares to allow its Supervisory Board to use professional and independent advisory services necessary for the Board to exercise effective supervision. In its selection of the advisory services provider, the Supervisory Board will take into account the financial condition of the Company.

III. Internal systems and functions III.R.1. The company’s structure should include separate units responsible for the performance of tasks within its systems or functions, unless the separation of such units is not justified by the size or type of the company’s activity. The Company’s structure includes separate units responsible for the performance of tasks within its systems or functions. The Company’s Management Board is responsible for the implementation, maintenance, and efficiency of internal control, risk management, and compliance systems, as well as internal audit function as recommended by good practices. Persons responsible for the operation of organisational units performing tasks related to the above systems and functions report directly to the President of the Management Board or to a designated member of the Management Board. The Company has in place an audit committee. The Company organisational chart is presented in section 1.1. of this Report.

IV. General Meeting, Shareholder Relations IV.R.1. Companies should strive to hold an ordinary general meeting as soon as possible after the publication of an annual report and set the date in keeping with the applicable legislation. The Company convenes a General Meeting and sets its date in keeping with the applicable legislation, striving to hold it as soon as possible after issuing a full-year report. In 2017, the Company convened the Annual General Meeting for June 12th 2017. IV.R.2. If justified by the structure of shareholders or expectations of shareholders notified to the company, and if the company is in a position to provide the technical infrastructure necessary for a general meeting to proceed efficiently using electronic communication means, the company should enable its shareholders to participate in a general meeting using such means, in particular through: • real-life broadcast of general meetings, • real-time bilateral communication where shareholders may take the floor during a general

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meeting from a location other than the general meeting, • exercise of the right to vote during a general meeting either in person or through a proxy. The Company does not apply the above recommendation. The Company’s Articles of Association and the Rules of Procedure for the Company’s General Meeting do not provide for real-time broadcasting of General Meetings. The Company believes that the documentation and proceedings of the General Meetings held to date guarantee transparency of the Company and protection of the rights of all shareholders. Further, information on passed resolutions is published by the Company in the form of current reports, also on its website. Therefore, investors are able to review the matters discussed at General Meetings. However, the Company may apply this principle in the future. In the opinion of the Company’s Management Board, the decision not to apply the abovementioned principle will not affect the reliability of the Company’s information policy, nor will it hinder shareholders’ participation in General Meetings. IV.R.3. Where securities issued by a company are traded in different countries (or in different markets) and in different legal systems, the company should strive to ensure that corporate events related to the acquisition of rights by shareholders take place on the same dates in all the countries where such securities are traded. This recommendation does not apply to the Company. The Company shares are listed only on the main market of the Warsaw Stock Exchange.

V. Conflict of Interest, Related Party Transactions V.R.1. Members of the management board and the supervisory board should refrain from professional or other activities which might cause a conflict of interest or adversely affect their reputation as members of the governing bodies of the company, and where a conflict of interest arises, immediately disclose it. Members of the Management Board and the Supervisory Board have committed to refraining from professional or other activities which might cause a conflict of interest. If a conflict of interest arises, the involved member of the Management Board or the Supervisory Board is obliged to inform the Management Board or the Supervisory Board, as appropriate, of the existing or potential conflict of interest and to abstain from voting on resolutions concerning matters which might involve this member in a conflict of interest. Any conflicts of interest are immediately and thoroughly investigated.

VI. Remuneration VI.R.1. The remuneration of members of the company’s governing bodies and key managers should follow the approved remuneration policy. The remuneration of members of the Company’s governing bodies and key managers follows the Company’s remuneration policy. For details on the Company’s remuneration policy, see section 8.14 of this Report. VI.R.2. The remuneration policy should be closely tied to the company’s strategy, its short- and long-term goals, long-term interests and results, taking into account solutions necessary to avoid discrimination on whatever grounds. The Company’s remuneration policy is closely tied to the Company’s strategy, its goals, interests, and results. For details on the Company’s remuneration policy, see section 8.14 of this Report. VI.R.3. If the supervisory board has a remuneration committee, principle II.Z.7 applies to its operations. This recommendation does not apply to the Company. The Company’s Supervisory Board has no remuneration committee. VI.R.4. The remuneration of members of the management board and the supervisory board and key managers should be sufficient to attract, retain and motivate persons with skills necessary for

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 59 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) proper management and supervision of the company. Remuneration should be adequate to the scope of tasks delegated to individuals, taking into account additional duties, for instance on supervisory board committees. The remuneration of members of the Company’s Management Board, Supervisory Board, and key managers is sufficient to attract, retain and motivate persons with skills necessary for proper management and supervision of the Company, and the remuneration is adequate to the scope of tasks delegated to those individuals. For details on the rules of remuneration of the Supervisory and Management Board members, see Section 8.14 of this Report. 8.3. Internal control and risk management systems In November 2009, the Supervisory Board established an Audit Committee in order to improve the efficiency of the Board’s work and to strengthen control over the Parent and the Group. The Audit Committee is an advisory body acting collectively within the Supervisory Board. The key areas monitored by the Audit Committee are the financial reporting processes and effectiveness of the internal financial control, internal audit and risk management systems in place at the Company. For a full description of the Audit Committee’s responsibilities, see further parts of this Report. Risk management at the Company is an element in the process of enhancing and protecting the Company’s value. The Company has identified risks in each area of its operations. As part of risk management, steps are taken to limit the possibility of a given risk occurring. The process also involves continuous improvements in the use of the risk management tools, including methods of risk identification, assessment and monitoring. Owners have been assigned to each risk. Risk Owners are responsible for defining an approach to identified risks, reacting to such risks in line with the approved plan, taking steps to mitigate the risks, and for performance of risk monitoring and reporting tasks. Risk Owners supervise respective individual risks, while the Management Board members responsible for individual processes and the Audit Committee perform the control function. Responsibility for the execution of operational function, that is day-to-day coordination of the risk management process, and for data consolidation lies with the Risk Management Coordinator. Every year, the Company carries out an assessment of the risk management process, which includes identification of new risks, assessment of the manner of managing the risks already identified, and updating and modifying risk weights. As part of the risk management, consultations are conducted with Risk Owners, and the Risk Register, List of Key Risks, Risk Map, risk sheets and key risk indicators are reviewed and updated. Periodic risk management reports are prepared. Solutions are in place enabling the management and supervisory bodies to fully monitor the risk management process. Consequently, individual measures form a systematic approach to risk management at the Company. This systematic approach is applied in performing tasks undertaken to review and ensure the correctness and effectiveness of measures taken to manage specific identified risks. The Company’s Internal Audit Department reports directly to the CEO - President of the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. This ensures hierarchical independence for audits and inspections. Internal audit at the Company takes the form of an independent, objective assessment of processes, systems and procedures in place at the Company’s units and subsidiaries, which enables more effective pursuit of Company objectives, identification of areas for operational improvement, and risk mitigation. The internal audit function also involves advisory services. Within the system, the instruments used to manage risks related to the process of preparation of financial statements include internal regulations governing the identification and recording of business events, as well as their presentation and publication. Direct supervision and coordination of work related to the preparation of financial statements falls within the remit of the Chief Accountant. The Company’s financial statements cover all aspects of its business operations. The heads of individual organisational units (departments, business units, support centres, divisions) are responsible for the content of the financial statements in the areas assigned to them under the Company’s organisational structure. Management Board members are actively involved in the preparation of financial statements at each stage of the process, by contributing to the production of individual components and final

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8.4. Management standards and systems The Management Policy implemented at the Company sets out the mission, courses of action and strategic objectives implemented based on management systems compliant with the highest international standards. The ever-growing social requirements and expectations regarding safety of processes and products requires conscious care of the product along the entire value chain, from raw materials procurement to final application. Based on its strategy, long-standing tradition, recognized brand, as well as Grupa Azoty’s support, the Company wants to strengthen its market position and meet the expectations of its business and social partnership by: • tracking global trends in applied technologies, ensuring continuous development and improvement of processes and products, • improving employees’ competences and optimal use of resources, creating conditions for the development of the entire Company, • continuously adapting product quality to customer requirements, • building strong and effective relationships with customers and by providing professional customer service, • reducing the sensitivity to changes in external costs of energy through the use of effective technologies and energy-efficient solutions, • reducing production costs through upgrades of key production lines, • improving the effectiveness of key processes and of knowledge gathering and management. The Company follows environmental protection principles as an integral part of the continuous improvement process, striving to achieve lasting and sustainable development which would respond to the needs of present and future generations. The Company strives to create optimum working conditions in a systemic and continuous manner, minimising risks at workplaces and improving OHS procedures in all management processes. The Company pursues a Management Policy which guarantees that strategic goals are achieved in reliance on an Integrated Management System consistent with international standards. The Integrated Management System is customer-centric and is structured around the principles of reducing environmental losses, mitigating the risk of hazards, and ensuring continuous improvement. The Company uses the following management systems and standards to ensure its actions and initiatives are effective: • Quality Management System compliant with the ISO 9001:2008 standard, • Environmental Management System compliant with the ISO 14001:2004 standard, • Energy Management System compliant with the ISO 50001:2011 standard, • Occupational Health and Safety Management System compliant with the BS OHSAS 18001:2007 standard, • Management System compliant with the PN-EN ISO/IEC 17025:2005 standard (setting general requirements for the competence of testing and calibration laboratories), • Food Safety Management System compliant with the ISO 22000:2005 standard, • Product Stewardship Management Standard. These systems are subject to periodic assessment and recertification. The Company assesses the compliance of its activities with the implemented management systems and legal requirements. Compliance with quality, environmental, food safety and energy management standards are tested in the course of internal audits of the management systems. Audit findings are presented at management reviews attended by representatives of top management and serve as the basis for improvement recommendations. External audits carried out by certification bodies confirm the compliance of the management systems with relevant standards, which has been documented by appropriate certificates.

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8.5. Shareholding structure Table 41. Shareholding structure as at the date of this Report Number of Ownership Number of % of total Shareholder shares interest (%) voting rights voting rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 11,956,000 15.94 11,956,000 15.94 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other shareholders 3,176,678 4.24 3,176,678 4.24 75,000,000 100.00 75,000,000 100.00

Table 42. Shareholding structure as at December 31st 2017 Number of Ownership Number of % of total Shareholder shares interest (%) voting rights voting rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 11,956,000 15.94 11,956,000 15.94 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other shareholders 3,176,678 4.24 3,176,678 4.24 75,000,000 100.00 75,000,000 100.00

According to the list of persons entitled to participate in the General Meeting called for June 12th 2017 provided to the Parent by the CSDP, OFE PZU Złota Jesień registered 11,900,000 shares, i.e. the shareholder’s interest in the Parent’s share capital increased to 15.94%.

Table 43. Shareholding structure as at December 31st 2016 Number of Ownership Number of % of total Shareholder shares interest (%) voting rights voting rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 11,673,570 15.56 11,673,570 15.56 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other shareholders 3,459,108 4.62 3,459,108 4.62 75,000,000 100% 75,000,000 100%

8.6. Special control powers of holders of securities All the Company shares carry the same rights. The State Treasury’s right to call General Meetings and to appoint and dismiss a Supervisory Board member are discussed in sections 8.8 and 8.10 of this Report. 8.7. Restrictions on voting rights There are no restrictions on the exercise of voting rights, such as restrictions on the exercise of voting rights by holders of a specific proportion or number of voting rights or time restrictions on the exercise of voting rights, etc. 8.8. Restrictions on the transferability of securities The Company’s Articles of Association impose no restrictions on the transferability of shares other than those provided for in the generally applicable laws.

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8.9. Rules governing appointment and removal of the management staff. Powers of the management staff, including in particular the authority to resolve to issue or buy back shares

Management Board

Procedures for the appointment of management personnel and for the granting of their powers The Company’s Management Board comprises from one to five persons, including the President, Vice-Presidents and Members of the Management Board. The number of Management Board members shall be defined by the governing body that appoints the Management Board. The Management Board’s joint term of office is 3 (three) years. A Management Board member submits his/her resignation to the Supervisory Board in writing. Subject to the provision discussed below, members of the Management Board or the entire Management Board are appointed by the Supervisory Board, following a recruitment process held to verify and evaluate the qualifications of candidates and to select the best candidate. The rules of and procedure for recruitment process are set out in resolutions of the General Meeting. As long as the State Treasury holds Company shares and the Company’s annual average headcount exceeds 500, the Supervisory Board appoints to the Management Board one person elected by the Company’s employees, to serve on the Management Board during its term of office. The person who receives the highest number of validly cast votes is considered to be a Management Board candidate elected by employees. The election results are binding on the Supervisory Board if at least 50% of all eligible employees participate in the election. The election is a direct election held by secret ballot and open to all employees, and is conducted by the Election Committees appointed by the Supervisory Board from among the Company’s employees. Failure by the Company’s employees to elect a member of the Management Board does not prevent the Management Board from adopting valid resolutions. Each member of the Management Board may be removed from office or suspended from their duties by the Supervisory Board or the General Meeting. The Management Board manages the affairs of the Company and represents it in all actions before and out of court. The operating procedures and the division of responsibilities among members of the Management Board are defined in the Rules of Procedure for the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. Pursuant to the Rules, the powers and responsibilities for the supervision of individual areas of the Company’s business are defined by the Management Board y way of resolutions. The Management Board is not authorised to make a decision to issue or buy back shares.

Supervisory Board

Rules governing appointment of supervisory staff The Supervisory Board consists of between five and nine members appointed by the General Meeting. However: • as long as the State Treasury holds Company shares, the entity authorised to exercise rights conferred by the shares held by the State Treasury has the right to appoint and dismiss one member of the Supervisory Board. Such appointment or dismissal takes effect upon service of a relevant notice/statement to the Management Board. • as of the date when the State Treasury ceased to be the Company’s sole shareholder, the Company employees retain the right to elect candidates to the Supervisory Board in the following proportions: o two persons − if the Supervisory Board consists of up to six members, o three persons − if the Supervisory Board consists of seven to nine members. Members of the Supervisory Board are appointed for a joint three-year term of office. A member of the Supervisory Board appointed by the General Meeting may be dismissed by the General Meeting at any time. Candidates to the Supervisory Board appointed, nominated or proposed by the State Treasury or a state-owned legal person, or by the Company’s parent, within the meaning of Art. 4.3 of the Competition and Consumer Protection Act of February 16th 2007, should meet the requirements set out in Art. 19 of the Act on State Property Management of December 16th 2016.

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Supervisory Board Members may tender their resignations in writing to the Management Board. The procedure for appointment of the Supervisory Board members elected from among candidates nominated by the employees is defined in detail in the Election Rules, adopted by the Supervisory Board by way of a resolution and approved by the General Meeting. The results of an election held in accordance with the provisions referred to above are binding on the General Meeting. The General Meeting appoints the Chairperson of the Supervisory Board. The Deputy Chairperson and the Secretary are elected by the Supervisory Board, at its first meeting, from among its members. 8.10. Rules governing amendments to the Parent’s Articles of Association Resolutions to amend the Articles of Association are passed following a three-fourths majority vote at the General Meeting. 8.11. Operation of the General Meeting The General Meeting operates in accordance with the Articles of Association and the Rules of Procedure of the General Meeting, which indicate in particular the rules governing operation of the General Meeting, the holding of meetings, adoption of resolutions and the holding of elections, including block vote elections to the Supervisory Board. The General Meeting adopts the Rules by way of a resolution. The General Meeting strives to ensure the stability of the Rules.

Calling of General Meeting. Agenda The General Meeting is convened by the Company’s Management Board: • on its own initiative, • at the request of the Supervisory Board, expressed in the Supervisory Board’s resolution, • at the written or electronic request from a shareholder or shareholders representing at least one-twentieth of the share capital, • at the written request of the State Treasury (shareholder) irrespective of its interest in the share capital, submitted no later than one month before the proposed date of the General Meeting. The Annual General Meetings is convened by the Management Board, and it should be held within six months of the end of the previous financial year. The business of Annual General Meetings covers: • review and approval of the financial statements for the previous financial year and of the Directors’ Report on the Company’s operations, • granting discharge to members of the Company’s governing bodies in respect of their duties, • distribution of profit or coverage of loss, • deciding on the dividend record date, on the dividend payment date and on payment of dividend in instalments, and • review and approval of the Group’s consolidated financial statements for the previous financial year and of the Directors’ Report on the Group’s operations, if their preparation is required under the Polish Accounting Act. The General Meeting may only pass resolutions concerning matters on its detailed agenda. The agenda is proposed by the Company’s Management Board or another entity which convenes the General Meeting. A shareholder or shareholders representing at least one-twentieth of the Company’s share capital may request that certain items be placed on the agenda of the next General Meeting. The State Treasury as a shareholder has the same right, irrespective of its interest in the share capital. Such requests with the statement of reasons, or draft resolutions on proposed items on the agenda, should be submitted at least 21 days prior to the scheduled date of the General Meeting. A shareholder or shareholders representing at least one-twentieth of the share capital may, before the date of the next General Meeting, submit draft resolutions concerning items placed or to be placed on the agenda of the General Meeting. The State Treasury as a shareholder has the same right, irrespective of its stake in the Company’s share capital. A resolution not to consider an item placed on the agenda may be passed only for valid reason. A proposal to pass such resolution requires a detailed statement of reasons. A decision to remove an item from the agenda or not to consider an item placed on the agenda upon a shareholder request is sanctioned in a resolution passed by the General Meeting, which must be

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 64 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) approved by all requesting shareholders present at the General Meeting and carried by at least 75% of the votes cast. Draft resolutions to be recommended for adoption by the General Meeting, and other important materials, must be presented to the shareholders together with the statement of reasons and the Supervisory Board’s opinion thereon prior to the General Meeting, sufficiently in advance to enable the shareholders to read and assess them. From the date of convention of the General Meeting, the Company publishes draft resolutions and all materials relating to the agenda on its website, at the following address: http://zchpolice.grupaazoty.com/pl/ A General Meeting may be attended by members of the media.

Adoption of resolutions The text of a resolution put to vote should be formulated in a manner that enables any eligible person who disagrees with how a given matter is resolved to challenge the resolution. The person raising an objection has the right to provide concise grounds for the objection. The General Meeting has the capacity to adopt resolutions irrespective of the number of shares represented at the Meeting. Resolutions are passed by an absolute majority of votes cast unless the Commercial Companies Code, the Articles of Association or the Rules of Procedure stipulate otherwise. Voting may be carried out with the use of electronic devices, including those based on IT systems.

Powers and responsibilities of the General Meeting Powers of the General Meeting include in particular: • review and approval of the financial statements for the previous financial year and of the Directors’ Report on the Company’s operations, • granting discharge to members of the Company’s governing bodies in respect of their duties, • distribution of profit or coverage of loss, • deciding on the dividend record date, on the dividend payment date and on payment of dividend in instalments, and • review and approval of the Group’s consolidated financial statements for the previous financial year and of the Directors’ Report on the Group’s operations, if their preparation is required under the Polish Accounting Act, • appointment and dismissal of the Supervisory Board members appointed by the General Meeting, including the Chairperson of the Supervisory Board, subject to the provisions of Art. 30.1 and Art. 32 of the Articles of Association, • determination of the rules and amounts of remuneration for Supervisory Board members, • approval of disposal or lease of the Company’s business or an organised part thereof, and creation of limited property rights therein, • approval of the following legal transactions if the market value of the subject matter of such transaction exceeds PLN 100,000,000 (one hundred million złoty) or 5% of the Company’s total assets: o acquisition or disposal of real property, usufruct right, or interest in real property or perpetual usufruct right, o acquisition or disposal of non-current assets, o granting of the right to use non-current assets to another entity for a period longer than 180 days in a calendar year, o acquisition or disposal of shares in another company, • determination of rules for disposal of non-current assets whose value exceeds 0.1% of the Company’s total assets, • approval of the execution by the Company of a loan, surety, or any other similar agreement with a member of the Management Board, Supervisory Board, proxy, liquidator, or for the benefit of any such person, • increase in or reduction of the Company’s share capital, • issue of convertible bonds, bonds with pre-emptive rights and subscription warrants, • squeeze-out carried out in compliance with applicable laws, • recognition, use, and release of capital reserves, • use of statutory reserve funds, • Decisions with respect to claims for redress of damage inflicted in the course of establishing the Company, its management or supervision,

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• merger, transformation, or demerger of the Company, • amendments to the Articles of Association and change of the Company’s business, • dissolution and liquidation of the Company, • review of the Supervisory Board’s reports referred to in Art. 28.1.8, 28.1.20, 28.1.22, and 28.1.23, • approval of the Election Rules referred to in Art. 32 of the Articles of Association, as adopted by the Supervisory Board, defining the procedure for appointment of the Supervisory Board members elected from among candidates nominated by the employees, and • adoption of the rules of procedure for the General Meeting, defining in detail how the Meeting is to be held and pass its resolutions, • determination of the rules of remuneration of Supervisory Board members, • determination of recruitment rules and selection procedure for members of the Company’s Management Board,

8.12. Composition and operation of the Company’s management and supervisory bodies

Management Board As at January 1st 2017, the composition of the Management Board was as follows: • Wojciech Wardacki, Ph.D. – President of the Management Board, • Włodzimierz Zasadzki, Ph.D − Vice President of the Management Board, • Tomasz Panas −Vice President of the Management Board, On March 3rd 2017, the Supervisory Board appointed a member of the Management Board representing the Company employees: • Anna Tarocińska − Member of the Management Board (representing Company employees). As at the date of this Report, the Parent’s Management Board was composed of: • Wojciech Wardacki, Ph.D. – President of the Management Board, • Włodzimierz Zasadzki, Ph.D − Vice President of the Management Board, • Tomasz Panas −Vice President of the Management Board, • Anna Tarocińska − Member of the Management Board (representing Company employees).

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. 834/VII/17 of October 11th 2017 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. 1004/VII/18 of February 19th 2018), approved by the Supervisory Board in Resolution No. 171/VII/18 of March

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15th 2018. Pursuant to Management Board Resolution No. 1054/VII/18 of March 19th 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: o Central Dispatch Division, o Internal Audit Division, o Marketing Division, o Public Relations Office, o Security Office, o Fertilizer Sales Department, o Human Resources and Management Department, o Tendering Department, o Fertilizers Business Unit, o Pigments Business Unit, • Włodzimierz Zasadzki, Vice President of the Management Board: o Finance Department, o Strategic Procurement Department, o Strategy and Development Department, o Logistics Centre o Infrastructure Centre. • Tomasz Panas, Vice President of the Management Board: o Nitro Business Unit, o Power Centre. • Anna Tarocińska, Management Board member elected by employees: o Technical Safety Department, o Laboratory Analysis Centre. As regards the division of duties among the Management Board members, the resolution also sets out their powers and responsibilities in the coordination of business processes. The Management Board members supervise and coordinate the following business processes: • Wojciech Wardacki, Ph.D., President of the Management Board and Chief Executive Officer: o Strategic management, o Comprehensive customer support, o Human Resources management. • Włodzimierz Zasadzki, Vice President of the Management Board: o Financial management, o Financial controlling, o Availability of feedstocks and raw materials, o Logistics support, o Production asset management, o Investment project management. • Anna Tarocińska, Management Board member elected by employees: o Technical and environmental safety. The President of the Management Board, assisted by the unit responsible for providing support to the Company’s governing bodies, performs ongoing supervision of the implementation of resolutions of the Parent’s Management Board, Supervisory Board, and General Meeting. The President of the Management Board convenes Management Board meetings on his/her own initiative, or at the request of a member of the Management or Supervisory Board, sets the agenda and chairs the meetings. In the President’s absence, these activities are performed by a Management Board member designated by the President of the Company’s 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:

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• general supervision and coordination of Company’s activities, • promoting a good image of the Company as a corporate citizen, • managing the work of the Company’s Management Board and presiding over its meetings, • performing the Company’s responsibilities as an employer within the bounds of the Polish Labour Code, • supervising the restructuring and privatisation processes at the Company and its subsidiaries, • supervising and coordinating business processes specified in the Management Board Rules of Procedure, and supervising organisational units that report directly to the President of the Management Board – Chief Executive Officer, • approving internal audit, business control and stocktaking plans, as well as making decisions on their implementation, and • representing the Company in and out of court, jointly with another Management Board member or proxy.

Supervisory Board Composition of the Company’s Supervisory Board as at January 1st 2017 was as follows: • Dariusz Hac − Chairman, • Joanna Habelman − Deputy Chairwoman, • Bożena Licht − Secretary, • Agnieszka Dąbrowska − Member, • Mirosław Kozłowski − Member, • Andrzej Malicki − Member, • Anna Tarocińska − Member, • Maria Więcek − Member. In the reporting period, the composition of the Supervisory Board changed as follows: • on March 26th 2017, the Extraordinary General Meeting passed Resolution No. 4 to dismiss Mr Dariusz Hac from the Supervisory Board; • on January 26th 2017, the Extraordinary General Meeting passed Resolution No. 5 to appoint Ms Joanna Habelman as Chair of the Supervisory Board. • Ms Anna Tarocińska resigned as member of the Supervisory Board with effect of March 3rd 2017, having been appointed to the Company’s Management Board. As at December 31st 2017, the composition of the Company’s Supervisory Board was as follows: • Joanna Habelman − Chairwoman, • Mirosław Kozłowski − Deputy Chairman, • Bożena Licht − Secretary of the Supervisory Board, • Agnieszka Dąbrowska − Member, • Andrzej Malicki − Member, • Maria Więcek − Member. 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 the January 1st 2017, the composition of the Audit Committee was as follows: • Joanna Habelman − Chairwoman of the Audit Committee, • Agnieszka Dąbrowska − Secretary of the Audit Committee, and • Mirosław Kozłowski − Member of the Audit Committee. In the reporting period, the composition of the Committee changed as follows: • on October 19th 2017, by Resolution No. 140/VII.17 of the Supervisory Board, Ms Maria Więcek was appointed Member of the Audit Committee having expertise and skills relevant for the

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industry in which the Company operates. As at December 31st 2017, the composition of the Company’s Audit Committee was as follows: • Joanna Habelman − Chairwoman of the Audit Committee, • Agnieszka Dąbrowska − Secretary of the Audit Committee, and • Mirosław Kozłowski − Member of the Audit Committee, • Maria Więcek − Member of the Audit Committee.

The Audit Committee’s tasks include in particular: • monitoring of: o the financial reporting process, o the effectiveness of internal control and risk management systems as well as internal audit systems in place at the Company, including effectiveness of the financial reporting process, o performance of financial audit, in particular an audit conducted by the audit firm, taking into account all recommendations and findings of the Audit Oversight Commission resulting from audits carried out at the audit firm; • controlling and monitoring of the independence of the qualified auditor and the audit firm, in particular when the audit firm also provides services other than the audit of financial statements; • informing the Supervisory Board of the audit findings and explaining how the audit contributed to the reliability of the Company’s financial reporting and what role the Audit Committee played in the audit; • assessing the auditor’s independence and approving the provision of permitted non-audit services by the auditor; • developing a policy for selecting an audit firm to conduct the audit; • developing a policy for providing permitted non-audit services by the audit firm carrying out the audit, entities related to the audit firm or a member of the audit firm’s network; • establishing an audit firm appointment procedure for the Company; • giving recommendations to the Supervisory Board on the appointment of auditors or auditing firms in line with the procedures referred to 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 provided for in the Rules of Procedure for the Audit Committee approved by Resolution No. 159/VII/17 of the Company’s Supervisory Board of December 28th 2017. 8.13. Diversity policy In its operations, the Parent follows its internal procedures governing employment and promotion. It also seeks to achieve diversity in terms of gender, education, age and professional experience of its entire workforce, including in particular members of the governing bodies and key management personnel. The Company’s Articles of Association define rules for appointment of the Management Board and for election of Management Board members by employees, while the Collective Bargaining Agreement defines the rules of hiring employees and the rules of remuneration for employees classified as management staff. Over the years, the Parent has developed rules that support non-discrimination and diversity, and ensure equal opportunities for professional development of the workforce, and thus contribute to higher work efficiency and the Grupa Azoty Group’s development. 8.14. Remuneration policy Remuneration system at the Parent The Company has in place a remuneration system defined in the Company’s Collective Bargaining Agreement of August 2nd 2011, as amended. The key component of remuneration is base pay, whose amount depends on the pay grade and the range of job groups defined in the Company’s Job Qualification Scale. When determining an employee’s pay grade, the following factors are taken into account: • type of complexity of the work performed, • the employee’s qualifications,

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• working conditions. The Company’s Collective Bargaining Agreement provides for a number of additional remuneration components, including: • allowance for work under special conditions, • team leader allowance, • allowance for serving as a jumper, • allowance for serving as a spreader, • allowance for serving as a chemical rescue worker, technical rescue worker or member of the SPOT consultancy team, • a lump sum allowance for work in the basic system with a three-shift work time schedule, • a lump sum allowance for work in the basic system with a two-shift work time schedule, • a lump sum allowance for work in the basic system with a two-shift work time schedule (three- team work schedule), • allowance for work on Sundays, statutory holidays, Company holidays, for night-time work and second-shift work, • allowance for serving as an internship supervisor, • allowance for non-standard loading and unloading activities. The remuneration policy is closely linked to the Company’s financial results. In particular, the rate of wage increase in a given year depends on the Company’s financial condition and profits earned. This is achieved through the use of a remuneration growth index which takes into account the above parameters. The Management Board and the trade unions sign a remuneration agreement defining the remuneration growth rate and the remuneration components to which the growth rate will apply. Certain remuneration components (annual and other bonuses) depend on profits earned by the Company. Annual bonus is paid if the Management Board adopts an appropriate resolution and provided that a predefined threshold of pre-tax profit per employee was reached in the previous year. The bonus is paid after the Management Board has examined and approved financial statements for the previous financial year. The rules for awarding annual bonuses are set out in the Rules of the Annual Bonus Scheme. The Company operates an Incentive Scheme based on the Strategic Score Card, whose rules are specified in the Rules for Granting Bonuses to the Employees of Grupa Azoty Zakłady Chemiczne Police S.A. The annual amount of the Bonus Fund is established by the Management Board in agreement with trade unions. The amount depends on the Company’s economic condition, current availability of funds (taking into consideration the Company’s needs and investments), as well as financial results delivered in past periods for which the Fund’s amount was determined. A bonus consists of the base component (representing 70% of the Bonus Fund and depending on the achievement of defined targets) and the discretionary component (representing 30% of the Bonus Fund established and based on results of periodical assessment carried out by the immediate superior). The rules for granting annual and other bonuses to employees are set out in the Rules for Granting Bonuses to the Employees of Grupa Azoty Zakłady Chemiczne Police S.A. and the Rules of the Annual Bonus Scheme.

Remuneration rules and amounts of remuneration for management personnel Pursuant to Resolution No. 4 of the Company’s Extraordinary General Meeting of October 20th 2010 on amendment to the Company’s Articles of Association, remuneration rules and the amount of remuneration for the Management Board members are determined by the Supervisory Board. On November 8th 2011, by Resolution No. 557/V/11, the Supervisory Board established new remuneration rules and amounts of remuneration for members of the Company’s Management Board. The resolution was later amended by the Supervisory Board by Resolutions No. 594/V/12 of March 13th 2012, No. 45/VI/14 of January 9th 2014 and No. 156/VI/15 of June 9th 2015. Resolution No. 557/V/11 (as amended) was repealed in full on April 7th 2016. On that day, the Supervisory Board passed Resolution No. 204/VI/16 defining new rules and amounts of remuneration payable to Management Board members. On March 29th 2017, the Extraordinary General Meeting passed Resolution No. 5 to approve the rules of remuneration for members of the Company’s Management Board. According to the resolution, the remuneration comprises a fixed component and a variable component. The Company’s Supervisory Board was authorised to determine the amounts of the fixed remuneration

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 70 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated) component for individual Management Board members. On March 31st 2017, by Resolution No. 66/VII/17, the Supervisory Board adopted the ‘Remuneration policy for members of the management and supervisory bodies of the Group companies’. Subsequently, on April 6th 2017, the Supervisory Board passed resolutions No. 95/VII/17, No. 96/VII/17 and No. 97/VII/17, defining the amounts of the fixed remuneration component for individual Management Board members (depending on a member’s position on the Management Board). Remuneration of members of the Management Board comprises: • fixed monthly remuneration (monthly base pay). The amount of monthly remuneration of a Management Board member is the multiple of the average monthly remuneration in the business sector, net of bonuses paid from profit, in the fourth quarter of the previous year, as announced by the President of the Central Statistics Office of Poland (GUS). Starting from the calendar month following the month in which the President of GUS announced the amount of the average monthly remuneration, the amount of the fixed remuneration is changed accordingly. The fixed remuneration is reduced by the amount payable for the days on which no work was performed by a Management Board member; • variable monthly remuneration (additional remuneration). The amount of variable remuneration depends on the progress in the delivery of management objectives (defined and approved by the Parent’s Supervisory Board) and is paid in accordance with the rules stipulated in Resolution No. 5 of the Company’s General Meeting of March 29th 2017, and in the Act on rules of remunerating persons who direct certain companies of June 9th 2016 (Dz.U. of 2016, item 1202). Bonuses for members of the Management Board On March 29th 2017, the Extraordinary General Meeting of passed a resolution on the rules of remuneration for members of the Company’s Management Board. Then, by way of a resolution dated March 31th 2017, the Supervisory Board adopted the Remuneration Policy for the management personnel of Grupa Azoty Group companies. A document “Rules governing variable remuneration of members of the governing bodies of the Grupa Azoty Group for delivery of annual business targets” is an appendix to the Policy. The key terms of the Rules are as follows: • the variable component of remuneration is calculated based on management objectives – key, shared and individual targets, • payment of variable remuneration is conditional upon fulfilment of the minimum level of the key targets defined by the Supervisory Board for a given year, • global targets are quantifiable and represent 50% of the total value of all targets, • individual targets represent 50% of the total target value, • the amount of variable remuneration depends on the achievement of shared and individual targets. The global targets are designed to support delivery of the Grupa Azoty’s Strategy, are outlined in the budget for a given financial year, and are common for all Management Board members. As individual targets, the Supervisory Board assigns from three to five individual tasks to be performed during a financial year by each Management Board member. The Supervisory Board assigns to each Management Board Member two to six individual objectives. The amount of variable remuneration of a Management Board member depends on the extent to which the global and individual targets, as defined in the Target Sheet approved by the Supervisory Board, have been achieved.

Table 44. Remuneration of Management Board members for holding office at the Parent for the 12 months of 2017 Remuneration paid Remuneration fixed variable Total potentially remuneration remuneration due* components components

Wojciech Wardacki 59.8 0.6 60.4 14.3 Tomasz Panas 488.5 67.6 556.1 456.3

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Włodzimierz Zasadzki 516.3 44.9 561.2 456.3 Tarocińska Anna 325.1 6.9 332.0 307.2 Kuźmiczonek Rafał** 350.0 0.2 350.2 0.0 * Remuneration potentially due corresponds to a provision recognised for performance-based annual bonuses, granted in accordance with the rules approved by the Supervisory Board. The annual bonus is planned to be paid in 2018. ** Remuneration under the employment contract, remuneration for the period from the date of dismissal to the date of termination of the employment contract due to dismissal, severance pay due for termination of employment, and non- compete compensation.

Table 45. Remuneration of Supervisory Board members for holding office at the Parent for the 12 months of 2017

Remuneration paid Remunerati on Total fixed variable potentially remuneration remuneration due components components Dąbrowska Agnieszka 68.2 0.0 68.2 0.0 Habelman Joanna 83.3 0.0 83.3 0.0 Hac Dariusz 10.8 0.0 10.8 0.0 Kozłowski Mirosław 77.7 0.0 77.7 0.0 Licht Bożena 75.1 0.0 75.1 0.0 Malicki Andrzej 73.2 0.0 73.2 0.0 Tarocińska Anna 15.3 0.0 15.3 0.0 Więcek Maria 71.1 0.0 71.1 0.0

For information on other transactions with members of the Company’s management and supervisory bodies, see Note 31 to the financial statements for the 12 months ended December 31st 2017.

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

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

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8.15. Agreements between the Parent and Management Board members On March 31st 2017, the Company’s Supervisory Board concluded management contracts with members of the Management Board for their respective terms of office, and post-employment non- compete agreements. On November 6th 2017, the management contracts were amended. 8.16. Sponsorship, charitable or similar activities Brand image and product promotion activities are carried out through a number of cultural, educational, scientific, sports and other initiatives.

Social and sponsorship policy As part of its sponsorship activities, the Company enters into sponsorship, promotional, advertising, donation and scholarship agreements. Being an entity of special economic importance for West Pomerania and the region’s largest user of the natural resources, the Company primarily supports projects with a regional focus. The Company builds its socially responsible image by supporting: • both professional and amateur sports, • cultural initiatives, including mass cultural events, • educational institutions for children and youth, • healthcare institutions providing services to employees and their families, • research programmes, • regional environmental initiatives, • social campaigns. Grupa Azoty S.A. conducts country-wide and international sponsorship activities on behalf of the entire Grupa Azoty Group.

Social and sponsorship initiatives for culture The Company supports local institutions and cultural events, including a concert on the Cursed Soldiers Remembrance Day and the Gryfia Polish Award for Female Writers.

Social and sponsorship initiatives for education of children and the youth In cooperation with schools and higher education institutions, the Company has for a number of years arranged training placements and internships for students. It also partners with local communities by supporting educational initiatives and institutions and by funding scholarship programmes. It also helps students and researchers interested in various aspects of the Company’s operations, by providing them (always in compliance with the applicable procedures) with materials for research papers and university dissertations.

Social and sponsorship initiatives for sports In 2017, the Parent continued its cooperation with MKS Pogoń Szczecin and KPS Chemik Police, a top-ranking women’s volleyball club. The Company initiated partnership with the Chemik Police Football Club as its Main Partner. With the provided support, the Club’s team has a chance to be promoted to the fourth football league. The Company also sponsors local amateur sports initiatives, including by providing financial assistance to: the ‘WODNIK’ Students’ Swimming Club, ‘Champion’ Students’ Sports Club, Szczecin Fencing Association, ‘Biegam bo Lubię’ Runners’ Club, ‘Dzik’ Runners’ Club, and the Police Sports and Recreation Centre.

Social and sponsorship initiatives to promote protection of human life and health The Parent actively responds to the needs of foundations, associations, schools, non-profit organisations and individuals in difficult circumstances. The Company in particular engages in projects which contribute to improving the quality of medical care or promote healthy lifestyles. In 2017, the Company’s support went, in particular, to the Tanowo Children’s Home, the Children’s Heart Foundation, the Safe Pomerania Foundation, and the Association of Soldiers Wounded and Injured in Foreign Missions.

Corporate social responsibility The Company takes CSR very seriously, engaging in projects to support local communities and regional development. The Company is actively involved in the activities of the Szczecin Region of

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Polish Scouting and Guiding Association and the Retirees Association of Former Employees of Grupa Azoty Zakłady Chemiczne Police S.A. Environmental protection is also a major element of its CSR activities. The Company has been increasing its capital expenditure on projects which enable the Company to meet the strict environmental protection requirements while maintaining a correct technological regime. One of the key pro-environmental projects is the adaptation of the flue gas desulfurisation unit on OP-230 boilers operated by the Power Centre to the requirements of Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions (integrated pollution prevention and control) (Industrial Emissions Directive, IED). As part of the task, the power boilers were revitalised and the flue gas denitrification and desulphurisation unit was built for the OP-230 boilers. Upon project completion, the volume of pollutant emissions into the air from the EC II CHP plant will be reduced, and the operational reliability and safety of OP-230 boilers will be improved. The Company also takes steps to create a safe working environment, promotes health and takes measures to prevent accidents, injuries and occupational diseases. The Company implements the highest OHS standards by applying the relevant OHS regulations. By implementing a regular risk assessment at the workplace, the Company implements appropriate risk control measures and mitigations. OHS employee training and implementing preventive programmes support improvements in the occupational safety system, which in turn helps build a friendly working environment. The Company implemented the ‘Report a Safety Hazard’ and ‘Zero Accidents’ preventive programmes, engaging the entire workforce in safety improvement efforts. With a view to providing highest-quality health care, it offered an additional medical package to all interested employees and their families. The integrated management system operated by the Company guarantees a high level of safety and is conducive to creating and promoting a friendly working environment. In recognition of its achievements in improving the working conditions, the Central Institute for Labour Protection awarded the Company with the ‘Safe Work Leader Gold Card’ for 2017–2018.

Charitable giving policy The Company engages primarily in projects contributing to better quality of medical care, promoting healthy lifestyles, fostering social and educational development of children and youth. It also plans to augment its involvement in initiatives designed to raise civic awareness and cultivate the Polish national identity. By engaging in social initiatives, the Company has been building its image as a community-oriented organisation committed to projects proposed by various NGOs, groups and individuals alike. Support for these activities is to a large extent provided in the form of donations, which enable the entities asking for assistance to achieve their supported objectives. The supported entities include: • Association of Honorary Blood Donors of the Republic of Poland – H. Dunant Honorary Blood Donors Club in Police, which was established in the former Police chemical plant and continues close cooperation with the Company. • In 2017, two joint blood donation sessions took place in front of the Company’s registered office. • LEŃ Water Association of Police; cooperation with the Association was related to pro- environmental activities, animal welfare and protection of natural heritage, in line with the Company’s relevant policy. • Retirees Association of Former Employees of Grupa Azoty Zakłady Chemiczne Police S.A. • ‘Polish Community’ (Wspólnota Polska) Association. The Company supports the Community in cultivating and fostering Polish traditions and national identity, as well as strengthening national and cultural awareness. • Polish Values Foundation, the organiser of the ‘Presents for Compatriots and Heroes from the Borderland’ campaign. This initiative is a token of gratitude to our compatriots in the Borderland for cultivating Polish language and recording history, as well as of the recognition of the hardships of living outside of Poland. It is a tribute to our contemporary heroes who cultivate the Polish identity far away from their homeland. • Children’s Home in Police. Being aware of the Home’s huge needs and persisting shortage of funds, the Company financially supported the summer holidays of the Home’s charges.

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In 2017, 35 donation agreements were signed for a total amount of PLN 441 thousand, in accordance with the Company’s Rues on donations, developed based on the Company’s Articles of Association and the relevant legal regulations. The Company’s donations went mostly to applicants from the Province of Szczecin, but in justified cases also from other provinces. Each application is considered separately. 8.17. Entertainment expenses, legal costs, marketing costs, public relations and social communication expenses, and management consultancy fees In 2017, the Company’s entertainment expenses, legal costs, marketing costs, public relations and social communication expenses, and management consultancy fees totalled PLN 38,359 thousand. Of that amount, PLN 30,076 thousand was spent on public relations services and PLN 4,905 thousand on marketing services. Entertainment expenses amounted to PLN 867 thousand. Public relations and social communication expenses were incurred, in particular, on building positive relationships with the social environment, with particular emphasis on the local and regional communities, as well as on the development of intra-Company media, including the monthly bulletin, intranet and Company radio station. The Company actively sponsored both professional and amateur sports, which included promotion of physical activity among children and the youth. The Parent also participated in the organisation of cultural events. All these initiatives favourably enhanced the Company’s image, both within the Company and in its environment, taking into account the stakeholders’ needs. Marketing activities included the promotion of product brands. The Company carried out advertising campaigns designed to consolidate the brand’s image and promote sales. These activities were also aimed at strengthening the visual identification of the Grupa Azoty brand and at closer identification of the brand with the Grupa Azoty Group’s products. In 2017, the amount of legal costs was PLN 572 thousand and management consultancy fees were PLN 1,939 thousand.

9. Other material information and events 9.1. Qualified auditor Parent Entity authorised to review and audit the financial statements for the financial year 2017: • Ernst & Young Audyt Polska Sp. z o.o. sp.k., with registered office at Rondo ONZ 1, Warsaw, Poland. • Date of the agreement for review and mandatory audit: July 27th 2017 • Term of the agreement: review and audit of financial statements for 2017–2019. In 2012–2016, the entity authorised to review and audit the financial statements was KPMG Audyt Sp. z o.o., with its registered office at ul. Inflancka 4A, Warsaw, Poland.

Table 46 Fees payable to qualified auditors for services rendered to the Parent Item 2017 2016 Audit of the full-year separate and consolidated financial statements 136 279* of the Company (the Group) and audit of the consolidation package Review of the half-year separate and consolidated financial statements of the Company (the Group) and review of the 53 49 consolidation package Other services - 62 Total 189 390 * Includes additional fees for non-standard work as part of the audit of the financial statements. Table 47. Fees payable to Ernst & Young Audyt Polska Sp. z o.o. sp. k. and other EY member firms for services rendered to the Group’s subsidiaries (data for 2016 represents remuneration of KPMG Audyt Sp. z o.o.) Item 2017 2016 Audit of the statutory full-year financial statements 157 13 Audit of the consolidation package 10 -

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Other services 60* - Total 227 13 * Financial audit of the financial statements of Supra Agrochemia Sp. z o.o. for the six months ended June 30th 2017. Table 48 Fees payable to other qualified auditors for services rendered in relation to the Group’s subsidiaries Item 2017 2016 Audit of the full-year separate financial statements and audit of the 13 173 consolidation package Total 13 173

9.2. Environmental performance The Company constantly monitors its ability to meet any newly legislated environmental requirements, and participates in social consultations of draft legal acts.

Compliance with legal requirements The Company operates based on an integrated permit, dated January 9th 2014, with amendments. The validity of the integrated permit is monitored on an ongoing basis, as a result of which two decisions of the Marshal Office of the Szczecin Province amending the permit were obtained in 2017: • the first amendment updated the integrated permit with respect to the production covered by the permit, • the second amendment updated the permit to ensure its compliance with Commission Implementing Decision (EU) 2016/902 of 30 May 2016 establishing best available techniques (BAT) conclusions for the common waste water and waste gas treatment/management systems in the chemical sector, published in the Official Journal of the European Union on June 9th 2016. No environmental fines were imposed on the Group in the reporting period.

Regular assessment of soil, land and groundwater contamination risk 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 2017.

External inspections In 2017, three external environmental inspections were carried out at the Company. On May 11th 2017, an inspection by the Provincial Inspectorate for Environmental Protection (WIOŚ) in Szczecin was completed. Its purpose was to verify compliance with environmental regulations in the area of gas and particles emissions and assess the correctness of emission-related transactions executed as part of the Transitional National Plan. In the course of the inspection it was found that the maximum sulfur dioxide emission limit set out in the TNP for the EC II CHP plant was exceeded by 3.74% and that construction of the DeSOx (flue-gas desulphurisation) unit at the EC II CHP plant was not completed in 2016. The Company provided additional explanations regarding the progress made in upgrading the CHP Plant II to ensure its compliance with the applicable legal requirements. No post-inspection recommendations were issued. On June 19th 2017, a joint inspection by the Provincial Inspectorate for Environmental Protection (WIOŚ), the National Labour Inspectorate (PIP) and the National Fire Service (PSP) was carried out 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 verify the operation of the major industrial accident prevention system. The Provincial Inspectorate for Environmental Protection did not identify any violations. From August 13th 2017 to September 11th 2017, an inspection of reclaimed leachate pond 1 at the iron sulfate (II) landfill site was carried out by the Provincial Inspectorate for Environmental

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Protection (WIOŚ) in Szczecin. The inspection found one non-conformity with the decision approving the closure of the leachate pond 1 at the iron (II) sulfate landfill site with respect to the terms set therein for the closure method. Following the inspection, on September 14th 2017 the Company submitted additional explanations, including its objections to and comments on the inspection report, to the Provincial Inspectorate for Environmental Protection (WIOŚ) in Szczecin. No post- inspection recommendations were issued.

Solid waste management Waste was managed in compliance with the terms of the integrated permit. Additionally, in order to meet the appropriate targets applicable to recovery and recycling of packaging waste, including composite and/or hazardous materials packaging waste, the Company works with packaging waste recovery companies.

Water and wastewater management The Company operates a sustainable water and wastewater management programme. The company takes care to ensure that the emission parameters are compliant with the terms of its integrated permit by supervising the wastewater treatment process. The company meets all the requirements defined in the integrated permit for the quantities of abstracted water, volumes of discharged wastewater, pollution parameters of treated wastewater, as well as the amounts of storm water and spent cooling water.

Air emissions The Company takes special care to ensure compliance with the terms of its integrated permit and applicable legal regulations on emissions into the air from production nodes. At the moment, two units are monitored on a continuous basis: • The ECII CHP plant − for SOx, NOx, and particulate matter emissions, • The titanium dioxide production unit (decomposition and calcination node) − for SOx, sulfuric acid mists, and particulate matter emissions. The company monitors the volumes of emissions of gaseous pollutants and particulate matter in accordance with the requirements defined in the integrated permit.

Noise emissions In accordance with the integrated permit, day- and night-time noise emissions from the Company were measured in 2017. No exceedance of permissible levels was identified.

Greenhouse gas emissions Five of the Company’s units are covered by the EU Emissions Trading System (EU ETS). They operate based on emission allowance decisions issued by the Marshal Office of the Province of Szczecin under the Act on Trading System for Greenhouse Gas Emission Allowances of October 5th 2016. An external review of annual greenhouse gas emission reports showed that in order to cover all of its 2017 emissions, the Company had to purchase 251,670 EUAs and 48,920 CERs. Given the continuing high prices of the allowances, the Company decided to surrender part of its allowances for 2018 (which had already been credited to the units’ EU accounts) in order to meet the 2017 shortfall. Therefore, the Company now has a sufficient number of allowances to redeem for its 2017 emissions. In 2017, the Company fulfilled all the other obligations under the EU ETS, required to surrender allowances for 2016 and 2017 emissions, i.e.: • annual greenhouse gas emission reports for the units covered by the EU ETS were prepared and reviewed by a reviewer licensed by the National Centre for Emissions Balancing and Management (KOBIZE), who redeemed the 2016 allowances, • a technology, production and emissions report for all of the Company’s units in 2016 was prepared and duly submitted to the KOBIZE database, • all measurement systems of the units were calibrated in accordance with the annual monitoring schedules, • all mandatory laboratory tests were carried out for all units emitting more than 500 thousand Mg CO2 per year in order to determine calorific values, emission factor and oxidation factor,

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• units covered by the EU ETS as well as their monitoring schedules were periodically reviewed in accordance with the applicable regulations of the European Commission, • mandatory CIM reports were prepared for the units covered by the EU ETS (with regard to changes in their production capacities) in order to enable proper allocation of free allowances for 2018, • statements of valid data for accounts maintained with the EU registry were updated and filed with KOBIZE.

Technical safety In the fourth quarter of 2017, the Company submitted an Internal Rescue Operation Plan prepared in compliance with the Regulation of the Minister of Interior and Administration of June 8th 2016 on requirements for rescue operation plans (Dz.U. of 2016, item 821) to the Commander-in-Chief of the State Fire Service in the Province of Szczecin. In the absence of any objections, the document was adopted for use by the Company on December 5th 2017. In 2017, the Company continued its cooperation with the State Fire Service in Police in order to raise staff’s awareness of operational and rescue measures as well as to consider potential technical and technological problems that may arise in connection with the operation of its production units. Accordingly, an annual training plan was prepared involving the exchange of knowledge and experience between the Company Fire Brigade and the State Fire Service in Police. The training is part of a wider programme designed to ensure the highest level of safety. 9.3. Awards and distinctions After a series of audits carried out in 2017 by certification body DNV-GL, the Parent, which is a member of Fertilizers Europe, was awarded a certificate in Product Stewardship for best practices in the management of the fertilizer life cycle. The Company was also one of the awardees of the ‘Employee-Friendly Employers’ competition, held by the trade union NSZZ ‘Solidarność’ under the auspices of the President of the Republic of Poland. The Parent received a medal for its outstanding contributions to the West Pomeranian University of Technology. Koncept Sp. z o.o., a subsidiary, was recognised as ‘ASTOR’s Professional Partner 2017’. Andrzej Rogowski, social labour inspector at the Company representing the trade union NSZZ ‘Solidarność’, was announced ‘the Most Active Social Labour Inspector’ in a competition held by the National Labour Inspector for the very first time in 2017.

10. Supplementary information Statement on non-financial information Pursuant to Art. 49b.11 of the Accounting Act, the Company is exempt from the obligation to prepare a statement on non-financial information as its parent, i.e. a higher level entity, issues a consolidated statement on non-financial information covering all companies of the Grupa Azoty Group as well as their respective groups. The Company’s parent is Grupa Azoty S.A. with its registered office at ul. E. Kwiatkowskiego 8, Tarnów, Poland.

Explanation of differences between actual results and financial forecasts As no forecasts for 2017 were published, the position of the Parent’s Management Board concerning achievement of such forecasts is not presented.

Litigation The Company is not a party to any pending proceedings concerning liabilities or debt claims whose value would represent 10% of Company’s equity and which would satisfy the materiality criteria specified in the Regulation of the Minister of Finance of February 19th 2009 on current and periodic information (consolidated text: Dz.U. of 2014, item 133, as amended). The total value of all proceedings involving the Company does not exceed 10% of its equity.

Material related-party transactions on non-arm’s length terms In 2017, the Group did not enter into any related-party transactions on non-arm’s length terms.

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Organisational changes at the Parent In the reporting period, there were no material organisational changes at the Parent.

Parent’s branches The Parent does not operate any branches or divisions outside of its principal place of business.

Shares, share issues In 2017, the Parent did not issue, redeem or repay any debt or equity securities. As at the date of this Report, the Parent was not aware of any agreements between shareholders or any agreements that may lead to future changes in the percentages of shares held by the existing shareholders and bondholders. The Company does not operate any control system for employee share ownership plan.

Material events after the reporting period No other material events were recorded by the Company after the reporting date.

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Index of tables Table 1. Parent’s equity interests in subordinated entities as at December 31st 2017 ...... 5 Table 2. Number of employees at the Grupa Azoty Zakłady Chemiczne Police Group ...... 10 Table 3. Number of employees at the Parent ...... 10 Table 4. Number of employees at consolidated subsidiaries* ...... 10 Table 5. Number of Group employees: annual average and at the end of 2017 ...... 10 Table 6. Number of employees at the Parent: average for the year and as at the end of 2017 ...... 10 Table 7. Number of employees at consolidated subsidiaries: annual average and at the end of 2017* ...... 11 Table 8. Employee turnover at the Group from January 1st to December 31st 2017 ...... 11 Table 9. Employee turnover at the Parent from January 1st to December 31st 2017 ...... 11 Table 10. Structure of the Group’s workforce by education ...... 11 Table 11. Structure of the Parent’s workforce by education ...... 11 Table 12. Structure of the Group’s workforce by length of service ...... 11 Table 13. Structure of the Parent’s workforce by length of service ...... 11 Table 14. Parent’s production volumes by product [tonnes] ...... 14 Table 15. Consolidated revenue by product ...... 14 Table 16. Agreements material to the Parent’s business ...... 17 Table 17. Consolidated financial results ...... 31 Table 18. Financial results of the Parent ...... 32 Table 19. EBIT by segment in 2017 ...... 32 Table 20. EBIT by segment in 2016 ...... 32 Table 21. The Group’s costs by nature of expense ...... 35 Table 22. The Parent’s costs by nature of expense ...... 35 Table 23. Structure of the Group’s assets ...... 35 Table 24. Structure of the Group’s equity and liabilities ...... 36 Table 25. Structure of the Parent’s assets ...... 37 Table 26. Structure of the Parent’s equity and liabilities ...... 38 Table 27. Profitability ratios ...... 38 Table 28. Liquidity ratios ...... 39 Table 29. Operational efficiency ratios ...... 39 Table 30. Debt ratios ...... 39 Table 31. The Group’s liabilities under bank loans as at December 31st 2017* ...... 40 Table 32. The Group’s liabilities under borrowings from related parties as at December 31st 2017* ...... 41 Table 33. Group’s liabilities under non-bank borrowings as at December 31st 2017* ...... 42 Table 34. Material financing agreements entered into or amended in 2017 and by the date of this Report . 42 Table 35 Sureties provided by the Parent as at December 31st 2017 ...... 43 Table 36. Guarantees provided in 2017 ...... 43 Table 37. Guarantees amended in 2017 ...... 44 Table 38. Shares held by management personnel ...... 53 Table 39. Stock performance ...... 54 Table 40. Recommendations concerning the Parent shares issued between January 1st 2016 and the date of this Report ...... 54 Table 41. Shareholding structure as at the date of this Report ...... 62 Table 42. Shareholding structure as at December 31st 2017 ...... 62 Table 43. Shareholding structure as at December 31st 2016 ...... 62 Table 44. Remuneration of Management Board members for holding office at the Parent for the 12 months of 2017 71

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Table 45. Remuneration of Supervisory Board members for holding office at the Parent for the 12 months of 2017 72 Table 46. Fees payable to qualified auditors for services rendered to the Parent ...... 75 Table 47. Fees payable to Ernst & Young Audyt Polska Sp. z o.o. sp. k. and other EY member firms for services rendered to the Group’s subsidiaries (data for 2016 represents remuneration of KPMG Audyt Sp. z o.o.) 75 Table 48. Fees payable to other qualified auditors for services rendered in relation to the Group’s subsidiaries ...... 76

Index of figures Figure 1. Structure of the Group as at December 31st 2017: ...... 6 Figure 2. Parent organisational chart as at December 31st 2015 ...... 9 Figure 3. Revenue by main product groups and other sales ...... 14 Figure 4. The Group’s sales by geographies (by revenue) ...... 15 Figure 5. Structure of capital expenditure by type ...... 20 Figure6. Monthly average prices of NPK and DAP fertilizers in 2017 [USD/t] ...... 29 Figure 7. Monthly average prices of ammonia and urea in 2017 [USD/t] ...... 29 Figure 8. Monthly average prices of titanium white in 2017 [EUR/t] ...... 30 Figure 9. The Group’s revenue by segment ...... 33 Figure 10. The Group’s revenue by segment ...... 33 Figure 11. Consolidated revenue of the Fertilizers Segment ...... 34 Figure 12. Consolidated revenue of the Pigments Segment ...... 34 Figure 13. Share performance in 2017 ...... 54

Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 81 of 82 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2017 (all figures in PLN ‘000 unless otherwise stated)

This Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2017 contains 82 pages.

Signatures of Members of the 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 Member of the Management Vice President of the Management Board Board

Police, April 12th 2018

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