Directors'report on the Operations of the Grupa Azoty Zakłady Azotowe

DIRECTORS’ REPORT ON THE OPERATIONS OF GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY SPÓŁKA AKCYJNA AND OF THE GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY GROUP

for the six months ended June 30th 2019

August 2019

Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

CONTENTS 1. GENERAL INFORMATION ABOUT GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY S.A. AND THE GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY GROUP ...... 3 1.1. ORGANISATION OF THE GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY GROUP ...... 3 1.2. CHANGES IN THE GROUP ’S STRUCTURE ...... 4 1.3. SHARE CAPITAL AND SHAREHOLDING STRUCTURE ...... 4 1.4. PARENT ’S MANAGEMENT AND SUPERVISORY STAFF ...... 7 1.5. GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY S.A. ON CAPITAL MARKET ...... 13 2. GROWTH PROSPECTS ...... 14 3. PRINCIPAL BUSINESS ACTIVITIES OF THE GRUPA AZOTY PUŁAWY GROUP COMPANIES ...... 15 4. ACTIVITIES OF THE GROUP COMPANIES ...... 16 4.1. FINANCIAL RESULTS ...... 16 4.2. KEY FEEDSTOCK AND RAW MATERIALS - MARKET SITUATION AND SUPPLY SOURCES ...... 27 4.3. CERTIFICATES OF ELECTRICITY ORIGIN ...... 34 4.4. GREENHOUSE GAS EMISSION ALLOWANCES ...... 35 4.5. MANUFACTURING AT THE GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY GROUP ...... 36 4.6. DISCUSSION AND ANALYSIS OF SEGMENTS ’ RESULTS ...... 37 4.7. CAPITAL INVESTMENT ...... 44 4.8. RESEARCH AND DEVELOPMENT ...... 48 4.9. ENVIRONMENTAL PROTECTION AND PROCESS SAFETY ...... 49 4.10. HR POLICY ...... 50 4.11. RANKINGS , AWARDS AND HONOURS ...... 50 5. FINANCIAL POLICY AND FINANCIAL RISK MANAGEMENT ...... 52 5.1. FINANCIAL LIQUIDITY AND FREE CASH MANAGEMENT ...... 52 5.2. BORROWING AGREEMENTS ...... 52 5.3. GUARANTEES AND SURETIES ISSUED ...... 57 5.4. LETTERS OF CREDIT ...... 62 5.5. INSURANCE POLICIES ...... 62 5.6. CURRENCY AND INTEREST RATE RISK MANAGEMENT ...... 66 6. BUSINESS ENVIRONMENT , FACTORS AND EVENTS AFFECTING OPERATIONS , RESULTS AND GROWTH PROSPECTS ...... 67 6.1. MACROECONOMIC OVERVIEW AND OUTLOOK ...... 67 6.2. EXCHANGE RATES ...... 68 6.3. INTEREST RATES ...... 68 6.4. ECONOMIC CLIMATE IN THE CHEMICAL INDUSTRY ...... 69 6.5. AGREEMENTS MATERIAL FOR THE GROUP ’S BUSINESS ...... 83 6.6. PENDING COURT , ARBITRATION OR ADMINISTRATIVE PROCEEDINGS ...... 84 7. OTHER MATERIAL INFORMATION ...... 85 8. FACTORS WHICH IN THE OPINION OF THE MANAGEMENT BOARD WILL AFFECT THE PERFORMANCE OF GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY S.A. AND THE GRUPA AZOTY PUŁAWY GROUP AT LEAST IN THE NEXT HALF -YEAR ...... 86 9. POSITION OF THE MANAGEMENT BOARD ON THE FEASIBILITY OF MEETING PREVIOUSLY PUBLISHED FORECASTS ...... 87 10. OPPORTUNITIES , THREATS , AND RISKS AFFECTING THE BUSINESS AND GROWTH OF GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY S.A. AND THE GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY GROUP ...... 87 10.1. OPPORTUNITIES ...... 87 10.2. THREATS ...... 87 11. THE GROUP ’S KEY RISKS ...... 88 11.1. GRUPA AZOTY ZAKŁADY AZOTOWE PUŁAWY S.A...... 88 11.2. GZNF FOSFORY SP. Z O .O...... 94 11.3. ZAKŁADY AZOTOWE CHORZÓW S.A...... 95

2 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

1. General information about Grupa Azoty Zakłady Azotowe Puławy S.A. and the Grupa Azoty Zakłady Azotowe PUŁAWY Group

1.1. Organisation of the Grupa Azoty Zakłady Azotowe PUŁAWY Group As at June 30th 2019, the Grupa Azoty Zakłady Azotowe Puławy Group (the “Grupa Azoty PUŁAWY Group”, the “Group”) comprised the Parent Grupa Azoty Zakłady Azotowe Puławy S.A. and seven subsidiaries. The Grupa Azoty PUŁAWY Group is part of the Grupa Azoty Group, whose parent is Grupa Azoty S.A. of Tarnów. Structure of the Group as at June 30th 2019

Grupa Azoty Zakłady Azotowe Puławy S.A. of Puławy

Zakłady Azotowe Chorzów S.A. of 96.48 96.15 STO-ZAP Sp. z o.o. of Puławy Chorzów 96.48 98.35

Gdańskie Zakłady Nawozów Fosforowych 99.19 Fosfory Sp. z o.o. of Gdańsk 99.23

94.61 REMZAP Sp. z o.o. of Puławy 96.33

84.69 PROZAP Sp. z o.o. of Puławy 86.20

99.99 SCF Natural Sp. z o.o. of Puławy 99.99

100.00 AGROCHEM PUŁAWY Sp. z o.o. of Puławy 100.00

ownership interest (%) % of total voting rights

Grupa Azoty Zakłady Azotowe Puławy S.A. holds equity interests in the following companies: 1. Bałtycka Baza Masowa Sp. z o.o. (50.0%); 2. Grupa Azoty KOLTAR Sp. z o.o. (20.00%); 3. TECHNOCHIMSERWIS Zamknięta Spółka Akcyjna of Moscow (25.0%); 4. MEDICAL Sp. z o.o. (0.81% interest in the share capital held indirectly through subsidiaries PROZAP Sp. z o. o., REMZAP Sp. z o. o. and STO-ZAP Sp. z o.o.).

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1.2. Changes in the Group’s structure Elektrownia Puławy Sp. z o.o. On January 2nd 2019, a merger between Grupa Azoty Zakłady Azotowe Puławy S.A. (the acquirer) and Elektrownia Puławy Sp. z o.o. (the acquiree) was registered in the National Court Register. The companies were merged in a simplified procedure, without increasing the acquirer’s share capital and without the acquiree’s shareholders acquiring any shares in the acquirer’s share capital, as Grupa Azoty Zakłady Azotowe Puławy S.A. had held 100% of shares in Elektrownia Puławy Sp. z o.o. Grupa Azoty KOLTAR Sp. z o.o. On January 8th 2019, an increase in the share capital of Grupa Azoty KOLTAR Sp. z o.o. to PLN 54,600,000 was registered in the National Court Register; Grupa Azoty Zakłady Azotowe Puławy S.A.’s ownership interest in the company rose to 20%. PROZAP Sp. z o.o. On February 26th 2019, the Management Board of PROZAP Sp. z o.o. cancelled one share held by a natural person. The percentage share of voting rights held by Grupa Azoty Zakłady Azotowe Puławy S.A. at the General Meeting of PROZAP Sp. z o.o. increased from 86.15% to 86.20%. Shareholding structure of PROZAP Sp. z o.o. after the change Number of voting Ownership % of total voting Shareholder Number of shares rights interest rights

Grupa Azoty Zakłady 1,399 84.69% 1,399 86.20% Azotowe Puławy S.A. KZ NSZZ Solidarność at 20 1.21% 20 1.23% PROZAP

Private individuals 204 12.35% 204 12.57% Cancelled shares 29 1.76% - - Total 1,652 100.00% 1,623 100.00%

1.3. Share capital and shareholding structure Grupa Azoty Zakłady Azotowe Puławy S.A. The Parent’s share capital amounts to PLN 191,150,000 and is divided into 19,115,000 shares with a par value of PLN 10 per share. Shares of all series, i.e. Series A and Series B, are ordinary bearer shares, each carrying one vote at the General Meeting. From the issue of the Q1 2019 report, the shareholding structure did not change. Shareholding structure of Grupa Azoty Zakłady Azotowe Puławy S.A. as at June 30th 2019 Number of voting % of total voting Shareholder Number of shares Ownership interest rights rights Grupa Azoty S.A. 18,345,735 95.98% 18,345,735 95.98% Other 769,265 4.02% 769,265 4.02% Total 19,115,000 100.00% 19,115,000 100.00%

In the period from the issue of the report for the first quarter of 2019 (May 23rd 2019) to the date of authorisation of this report for issue, there were no changes in the number of Grupa Azoty Zakłady Azotowe Puławy S.A. shares held by the Parent’s management or supervisory staff. 4 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

As at June 30th 2019 and as at the date of authorisation of this report for issue, none of the members of the Parent’s management or supervisory staff held any shares in Grupa Azoty Zakłady Azotowe Puławy S.A. In the period from June 30th 2019 to the date of authorisation of this report for issue, there were no changes in the shareholding structure of Grupa Azoty Zakłady Azotowe Puławy S.A. In the period from January 1st 2019 to June 30th 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. did not acquire its own shares. As at June 30th 2019, none of the subsidiaries or associates of the Grupa Azoty Zakłady Azotowe Puławy Group held shares in Grupa Azoty Zakłady Azotowe Puławy S.A. Grupa Azoty Zakłady Azotowe Puławy Group companies GZNF Fosfory Sp. z o.o. The share capital of GZNF Fosfory Sp. z o.o. amounts to PLN 59,003,400 and is divided into 117,963 shares with a par value of 500 per share. All the shares are ordinary shares and each confers the right to one vote at the General Meeting.

Shareholding structure of GZNF Fosfory Sp. z o.o. as at June 30th 2019

Number of voting Number of Ownership % of total voting Shareholder rights shares interest rights

Grupa Azoty Zakłady Azotowe Puławy S.A. 117,055 99.19% 117,055 99.23% Employees 908 0.77% 908 0.77% Cancelled shares -* 0.04% - 0.00% Total 117,963 100.00% 117,963 100.00%

*On November 25th 2003, 438 shares with a total par value of PLN 21,900 were cancelled and a resolution was passed to increase the par value of shares to PLN 500 per share. Zakłady Azotowe Chorzów S.A. The share capital of Zakłady Azotowe Chorzów S.A. amounts to PLN 94,700,000 and is divided into 9,470,000 shares with a par value of PLN 10 per share. All the shares are ordinary shares and each confers the right to one vote at the company’s General Meeting.

Shareholding structure of Zakłady Azotowe Chorzów S.A. as at June 30th 2019 Number of Number of Ownership % of total voting Shareholder voting rights shares interest rights

Grupa Azoty Zakłady Azotowe Puławy S.A. 9,136,583 96.48% 9,136,583 96.48% Other shareholders 333,417 3.52% 333,417 3.52% Total 9,470,000 100,00% 9,470,000 100,00% AGROCHEM PUŁAWY Sp. z o.o. The share capital of AGROCHEM PUŁAWY Sp. z o.o. is PLN 68,639,100 and comprises 686,391 shares with a par value of PLN 100 per share. All the shares are ordinary shares and each confers the right to one vote at the General Meeting.

5 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Shareholding structure of AGROCHEM PUŁAWY Sp. z o.o. as at June 30th 2019 Number of Number of Ownership % of total voting Shareholder voting rights shares interest rights

Grupa Azoty Zakłady Azotowe Puławy S.A. 686,391 100% 686,391 100% REMZAP Sp. z o.o. The share capital of REMZAP Sp. z o.o. amounts to PLN 1,811,670 and is divided into 25,881 shares with a par value of PLN 70 per share. All shares are ordinary shares and each share carries one vote at the General Meeting.

Shareholding structure of REMZAP Sp. z o.o. as at June 30th 2019 Number of Number of Ownership % of total voting Shareholder voting rights shares interest rights

Grupa Azoty Zakłady Azotowe Puławy S.A. 24,486 94.61% 24,486 96.33% Other shareholders 933 3.60% 933 3.67% Cancelled shares 462 1.79% 0 0.00% Total 25,881 100.00% 25,419 100.00%

PROZAP Sp. z o.o. The share capital of PROZAP Sp. z o.o. amounts to PLN 826,000, and is divided into 1,652 shares with a par value of PLN 500 per share. All the shares are ordinary shares and each confers the right to one vote at the General Meeting.

Shareholding structure of PROZAP Sp. z o.o. as at June 30th 2019 Number of Number Ownership % of total voting Shareholder voting rights of shares interest rights

Grupa Azoty Zakłady Azotowe Puławy S.A. 1,399 84.69% 1,399 86.20% KZ NSZZ Solidarność at PROZAP 20 1.21% 20 1.23% Private individuals 204 12.35% 204 12.57% Cancelled shares 29 1.76% - - Total 1,652 100.00% 1,623 100.00% SCF Natural Sp. z o.o. The share capital of SCF Natural Sp. z o.o amounts to PLN 15,001,000, and is divided into 150,010 shares with a par value of PLN 100 per share. All shares are ordinary shares and each share carries one vote at the General Meeting.

6 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Shareholding structure of SCF Natural Sp. z o.o. as at June 30th 2019 Number of voting Number of Ownership % of total voting Shareholder rights shares interest rights

Grupa Azoty Zakłady Azotowe Puławy S.A. 150,000 99.99% 150,000 99.99% Łukasiewicz Research Network New Chemical Syntheses Institute 10 0.01% 10 0.01% of Puławy Total 150,010 100.00% 150,010 100.00%

1.4. Parent’s management and supervisory staff Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A.

Position Name As at Jun 30 2019

Krzysztof Bednarz President of the Management Board Krzysztof Homenda Vice President of the Management Board Izabela Świderek Vice President of the Management Board Anna Zarzycka-Rzepecka Vice President of the Management Board Andrzej Skwarek Member of the Management Board

In the period from January 1st 2019 to June 30th 2019, there were no changes in the composition of the Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A.

Supervisory Board of Grupa Azoty Zakłady Azotowe Puławy S.A.

Position Name As at Jun 30 2019 Jacek Nieścior Chairman of the Supervisory Board Maciej Marzec Deputy Chairman of the Supervisory Board Wiktor Cwynar Secretary of the Supervisory Board Krzysztof Majcher Member of the Supervisory Board Grzegorz Madziarz Member of the Supervisory Board Jacek Wójtowicz Member of the Supervisory Board

In the period from January 1st 2019 to June 30th 2019, there were no changes in the composition of the Supervisory Board of Grupa Azoty Zakłady Azotowe Puławy S.A.

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Audit Committee of Grupa Azoty Zakłady Azotowe Puławy S.A.

Position Name As at Jan 1 2019 As at Jun 30 2019 Krzysztof Majcher Chairman Chairman Wiktor Cwynar Member Member Jacek Nieścior Member Member

In the period from January 1st 2019 to June 30th 2019, there were no changes in the composition of the Audit Committee of Grupa Azoty Zakłady Azotowe Puławy S.A.

Commercial proxies

Position Name As at Jan 1 2019 As at Jun 30 2019

Anna Gol Commercial proxy with joint power of proxy Commercial proxy with joint power of proxy

Activities of the management bodies The Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A. acts pursuant to the Company’s Articles of Association, the Rules of Procedure for the Management Board and the laws of general application. The Management Board manages the affairs of the Company and represents it in all actions before and out of court. The powers and responsibilities of the Management Board include all matters connected with managing the Company’s affairs that are not reserved for the General Meeting or the Supervisory Board by the applicable laws or the Articles of Association. The Management Board is headed by its President. Any matters which fall outside the scope of the ordinary course of the Company’s business require a resolution by the Management Board. Any Management Board member may request passing a resolution on matters concerning the Company. The President of the Management Board may not refuse to put such a matter to vote. However, the President of the Management Board may require that the members who request the putting of a resolution to vote justify the need to do so to the other members, in order to ensure that the other members of the Management Board have an opportunity to thoroughly look into the matter to be addressed by the resolution. In particular, the Management Board adopts resolutions regarding the following matters: • approval of the Rules of Procedure for the Management Board; • approval of the donation rules; • approval of the Company’s organisational rules; • opening and closure of branches, plants, offices, representative offices and other entities; • appointment of a commercial proxy; • borrowing and lending; • issue of notes and bonds; • adoption of annual business plans and budgets, as well as long-term strategic plans; 8 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

• adoption of periodic risk management policies with respect to specific risks; • approval of the financial statements and Directors’ Report on the Company’s operations; • contracting of contingent liabilities, including granting by the Company of guarantees and sureties or any assumption of liability for a third-party debt, as well as issuing, accepting and endorsing promissory notes and granting of avals; • disposal, including acquisition and encumbrance with limited property rights, of non-current assets whose market value is equal to or exceeds PLN 100,000 (one hundred thousand złoty); • matters referred by the Management Board for consideration to the Supervisory Board or to the General Meeting. As regards matters that do not require adoption of a resolution by the Management Board, each Management Board member acts individually, within the scope of powers assigned to the Management Board member, and also beyond the assigned scope of powers if the relevant member of the Management Board cannot perform a given action or if the best interest of the Company so requires. Each member of the Management Board has the right to ask for information on actions taken by the other Management Board members. Management Board meetings are held as needed, however no less frequently than once a month. Management Board meetings are convened by the President of the Management Board on his/her own initiative or at the request of another Management Board member. In the President’s absence, meetings of the Management Board are convened by its Vice President. Management Board meetings may also be held without being formally convened, provided that all members of the Management Board are present and none of them objects to holding the meeting. The Management Board is not authorised to make decisions on share issue or buy-back. Pursuant to the Articles of Association, decisions on such matters are made by the Company’s General Meeting. Activities of the supervisory bodies The Supervisory Board of Grupa Azoty Zakłady Azotowe Puławy S.A. consists of five (5) to nine (9) members, appointed by the Company’s General Meeting. As long as the State Treasury holds Company shares, the minister competent for the State Treasury is entitled to appoint and remove from office one member of the Supervisory Board by submitting a written statement to the Company’s Management Board. Such appointment or removal from office becomes effective upon delivery of the relevant statement to the Management Board and does not require a resolution of the General Meeting. Some of the Supervisory Board members are elected pursuant to Art. 14 of the Act on Commercialisation and Certain Employee Rights. Supervisory Board members are appointed for a joint three-year term of office. A member of the Supervisory Board appointed by the General Meeting may be removed by the General Meeting at any time, subject to the provisions concerning appointment of Supervisory Board members by the Ministry of State Treasury and by Company employees. The Supervisory Board operates pursuant to the generally applicable laws, the Company’s Articles of Association, and the Rules of Procedure for the Supervisory Board. The powers and responsibilities of the Supervisory Board include: 1) appointment and removal from office of Management Board members, 2) determining the amount of remuneration for Management Board members in accordance with the rules established by the General Meeting,

9 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

3) suspension from duties, for a good reason, of individual or all Management Board members, 4) delegation of Supervisory Board members to temporarily stand in for Management Board members who are unable to perform their duties, 5) determining the amount of remuneration for a Supervisory Board member delegated to temporarily perform the duties of a Management Board member not exceeding the fixed component of the monthly remuneration of the Management Board member whose duties are delegated to the Supervisory Board member, in accordance with the rules for determining remuneration for members of the Company’s Management Board established by the General Meeting, 6) granting consent to Management Board members to serve on governing bodies of other companies, 7) assessment of the Directors’ Report on the Company’s operations and the financial statements for the previous financial year in terms of their consistency with the accounting records, documentary evidence, and the actual state of affairs, 8) assessment of the Management Board’s proposal concerning distribution of profit or coverage of loss, 9) submission of written reports on the results of the assessments referred to in 7–8 above to the General Meeting, 10) assessment of the Directors’ Report on the Group’s operations and the Group’s consolidated financial statements for the previous financial year in terms of their consistency with the accounting records, documentary evidence, and the actual state of affairs, and submission of a written report on the results of the assessment to the General Meeting, if in accordance with the applicable laws the Company has the obligation to prepare consolidated financial statements, 11) appointment of an audit firm to perform an audit of the financial statements of the Company and the consolidated financial statements of the Group, 12) determination of the scope and submission dates of annual budgets and long-term strategic plans, 13) approval of the Company’s long-term strategic plans, 14) approval of annual budgets including capital expenditure budgets, 15) adoption of detailed rules governing the Supervisory Board’s operations, 16) adoption of the consolidated text of the Company’s Articles of Association prepared by the Management Board, 17) approval of the rules of procedure for the Company’s Management Board, 18) approval of the Company’s organisational rules, 19) approval of the rules on donations, 20) giving opinions on all matters submitted by the Management Board for consideration to the General Meeting, 21) preparation of a report on the activities of the Supervisory Board, including activities of the Supervisory Board committees, to be submitted to the Annual General Meeting; 22) preparation of a report on the assessment of the Company’s condition, including evaluation of its internal control and risk management systems, for the Annual General Meeting,

10 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

23) preparation of a report for the Annual General Meeting on the assessment of the Company’s compliance in the reporting period with the relevant corporate governance standards, and in particular with the disclosure requirements set out in the Stock Exchange Rules and in the applicable laws, 24) approval of the rules defining the procedure for appointment of members of the Company’s governing bodies by employees. The powers and responsibilities of the Supervisory Board include granting consent to the Management Board for: 1) acquisition or disposal of ownership or perpetual usufruct rights to real property, or of an interest in real property or perpetual usufruct right, 2) a legal transaction if the value of the subject matter of the transaction exceeds PLN 6,000,000 (six million złoty), other than any: a) transactions included in the approved annual budgets, b) contracts concluded in the ordinary course of the Company’s business, i.e. contracts for the sale of products manufactured by the Company, sale of merchandise and for the purchase of merchandise, raw materials and feedstocks, 3) the Company’s entering into a donation agreement or an arrangement having a similar effect, as well as a debt cancellation agreement or another legal arrangement having a similar effect, in both cases if the value of the subject matter of such transaction exceeds PLN 20,000 (twenty thousand złoty) or 0.1% of the Company’s total assets, 4) execution of a material related-party agreement, excluding contracts concluded in the ordinary course of the Company’s business, i.e. contracts for the sale of products manufactured by the Company and for the purchase of raw materials and feedstocks concluded on an arm’s length basis, 5) execution or amendment of an agreement for the provision of legal services, marketing services, public relations and social communication services, or management consultancy services, if the total fees for the services to be provided under such agreement exceed PLN 500,000 (five hundred thousand złoty), VAT exclusive, per year, or if the lump-sum or maximum amount of the fees is not provided for in the agreement, 6) adoption of periodic risk management policies with respect to specific risks; 7) formation or co-financing by the Company of foundations or other organisations other than commercial-law companies, 8) formation of the Company’s establishments, offices, branches or representative offices abroad, 9) exercising voting rights at the general meetings of companies in which the Company holds at least a 50% (fifty per cent) interest, where the voting concerns any of the following matters: a) amendments to the company’s articles of association, b) increase or reduction of the company’s share capital, c) merger, transformation or demerger of the company, d) disposal of company shares, e) disposal or lease of the company’s business or its organised part, or establishment of limited property rights in the company’s business or its organised part, or acquisition or

11 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

disposal of ownership or perpetual usufruct rights to real property or of an interest in ownership or perpetual usufruct rights to real property, f) dissolution and liquidation of the company, 10) establishment of another company or joining of another company by the Company. The Company’s Supervisory Board meetings are convened by the Chairperson or the Deputy Chairperson of the Supervisory Board whenever the Company’s interest so requires, but in any case not less frequently than every two months. The Chairperson of the Supervisory Board is required to convene a Supervisory Board meeting upon a written request of any member of the Supervisory Board or Management Board. Any Supervisory Board member or the Management Board may request that certain matters be placed on the agenda of a planned Supervisory Board meeting. A Supervisory Board member may participate in a Supervisory Board meeting through means of remote communication (conference calls or video-conferences) which enable simultaneous communication and identification of at least the Chairperson of the Supervisory Board. If a resolution is voted on through means of remote communication (at a conference call or video- conference), Supervisory Board members cast their votes by submitting oral statements on how they vote on the resolution to the Chairperson. The Supervisory Board may adopt resolutions during its meeting by written ballot or through means of remote communication. Adoption of a resolution through means of remote communication requires a justification and prior submission of the draft resolution to all Supervisory Board members. Adopting resolutions through means of remote communication is not permitted in the case of election of the Chairperson, Deputy Chairperson or Secretary of the Supervisory Board, appointment of Management Board members, and removal from office or suspension from duties of any of such persons, other personnel matters as well as other matters requiring a secret ballot. The Supervisory Board appoints an Audit Committee from among its members, and may also appoint a Remuneration Committee. Audit Committee Grupa Azoty Zakłady Azotowe Puławy S.A.’s Audit Committee consists of at least three members elected from among the Supervisory Board members. At least one member of the Audit Committee should have the expertise and competence in accounting or auditing of financial statements. The Audit Committee members should also have the knowledge and skills required in the industry in which the Company operates. This requirement is deemed met if at least one Audit Committee member has such knowledge and skills or individual members have the knowledge and skills specific to different aspects of the industry in which the Company operates. Members of the Supervisory Board delegated to independently perform supervisory tasks on the Audit Committee must meet the criteria of independence in compliance with the provisions of Section 4 of Annex I to the European Commission Recommendation of 15 February 2005 of the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board (Official Journal of the European Union 52/51 of 25 February 2005). The Audit Committee’s key responsibilities include: 1) performing the tasks assigned to the Audit Committee in accordance with the Act on Statutory Auditors, Audit Firms, and Public Oversight of May 11th 2017, the Company’s Articles of Association and resolutions of the Supervisory Board; 2) adopting internal audit plans, in accordance with the regulations applicable at the Company; 3) assessing the performance of internal audit plans;

12 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

4) adopting regulations for the internal audit function; 5) approving reports on the operation of the internal audit unit; 6) review of operating conditions of the internal audit unit; 7) initiating ad hoc audits or inspections, where appropriate; 8) supporting the internal audit function, where appropriate, in situations where irregularities are identified or it is not possible to properly carry out any of the tasks assigned to the internal audit unit; 9) monitoring of matters related to internal and external inspections carried out at the Company; 10) auditing selected events or areas of the Company’s operations, where appropriate; 11) performing any other tasks assigned to the Committee by the Supervisory Board.

1.5. Grupa Azoty Zakłady Azotowe Puławy S.A. on capital market As at June 28th 2019 (a Friday), Grupa Azoty Zakłady Azotowe Puławy S.A.’s stock traded at PLN 104.00 per share, up 55.22% on the closing price of PLN 67.00 per share on January 2nd 2019. Over the same period, the WIG index grew 3.25%. During the reporting period, the lowest price of Grupa Azoty Zakłady Azotowe Puławy S.A.’s stock, of PLN 64.00 per share, was recorded on January 3rd 2019, and the highest price, of PLN 117.00 per share – on February 19th, February 21st and March 4th 2019. As at the end of June 2019, the Company’s market capitalisation was PLN 1,988m. Key events which might have had an impact on the price of Grupa Azoty Zakłady Azotowe Puławy shares in the first half of 2019: A. January 2nd 2019 – the merger between Grupa Azoty Zakłady Azotowe Puławy S.A. (the acquirer) and Elektrownia Puławy Sp. z o.o. (the acquiree) was registered in the National Court Register; B. March 4th 2019 − Grupa Azoty Zakłady Azotowe Puławy recognised a PLN 3.45m impairment loss on its holding in Zakłady Azotowe Chorzów S.A., a subsidiary; C. March 6th 2019 − Grupa Azoty Zakłady Azotowe Puławy S.A. made a change to its accounting policies; the effect of the change on the Company’s separate net profit/(loss) for 2018 was PLN (-)10.8m, and on retained earnings – PLN (+) 40.4m; D. April 16th 2019 – the Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A. passed a resolution to accept, on a preliminary basis, a bid placed by a consortium in the tender procedure to select the general contractor for the ‘Construction of a coal-fired power generation unit in Puławy’ project; E. April 25th 2019 – Grupa Azoty Zakłady Azotowe Puławy S.A. issued its full-year financial statements for 2018, showing a consolidated net profit of PLN 55.3m; F. April 25th 2019 – estimated selected consolidated financial figures of the Grupa Azoty PUŁAWY Group for the first quarter of 2019 were published, showing a net profit of PLN 168.1m; G. May 23rd 2019 – Grupa Azoty Zakłady Azotowe Puławy S.A. issued its quarterly financial statements for the first quarter of 2019, showing a consolidated net profit of PLN 167.9m; H. May 23rd 2019 – the effective terms of the Individual Contracts with Polskie Górnictwo Naftowe i Gazownictwo S.A. were extended until September 30th 2022;

13 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

I. June 24th 2019 − the Annual General Meeng of Grupa Azoty Zakłady Azotowe Puławy S.A. passed a resolution to pay dividend for 2018.

2. Growth prospects Grupa Azoty Zakłady Azotowe Puławy S.A. is the Parent of the Grupa Azoty Puławy Group, and pursues its growth strategy with a particular focus on increasing economic value added in the long term. In its growth-oriented efforts, the Grupa Azoty PUŁAWY Group focuses on thorough analysis of customers’ needs, meeting their requirements, and delivering value added with every one of its products. Thanks to close relationships with customers the Group is able to improve its products and develop them to meet the market expectations. The Parent’s market environment and, in particular, the significant differences in prices of basic raw materials in different parts of the globalized market, require the Group to take measures aimed at improving its competitive position. The Parent attaches particular importance to its ability to correctly identify and satisfy the needs of the end users of its products. Development programmes and projects pursued by the Parent cover a complete value chain, with emphasis on production processes, product manufacturing technology, logistics, application technology and product usability and procedures, and customer service tools and techniques. The objective is to maintain strong market position through implementation of an integrated business model, enabling the Group to flexibly adjust its production and distribution profile to market developments. The model is built on the following strategic objectives: • increased innovation (developing new niche products, offering new and improved products and services, bringing innovative value to customers, strengthening ties with customers and research institutions); • improved operational efficiency (cost reduction, margin management, diversified raw material sources); • optimisation of costs and resources (energy and process efficiency, securing external financing, cancellation of shares);

14 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

• investment in human capital (growing experience and competence, knowledge management, building relationships). All Grupa Azoty PUŁAWY Group companies are highly committed to environment protection and safety at work, implementing initiatives to mitigate nuisance caused by their manufacturing and production processes. In its R&D activities, the Group focuses on continuously improving and expanding its product range and manufacturing capabilities through economies of scale and new applications of existing products, and on addressing environmental aspects, also by engaging in ‘green chemistry’ projects (research into biotechnologies, bioprocesses and biodegradable products).

3. Principal business activities of the Grupa Azoty PUŁAWY Group companies

Parent

• manufacture of basic chemicals, nitrogen fertilizers and compounds, and plastics,

• manufacture of other chemical products, Grupa Azoty Zakłady • production, transmission and distribution of electricity, Azotowe • production and distribution of heat (steam and hot water), Puławy S.A. • water collection, treatment and supply, • sewerage and waste management and remediation activities, • wholesale and retail trade, excluding sale of automotive vehicles. Consolidated companies • manufacture and sale of mineral fertilizers and chemical products, • handling and storage of liquid and bulk materials GZNF Fosfory with the use of terminals and wharves for loading and unloading ships, Sp. z o.o. • laboratory services, • property lease. • manufacture and sale of fertilizers, • manufacture and sale of industrial chemicals and food chemicals, Zakłady Azotowe • generation and distribution of heat, Chorzów S.A. • distribution of utilities (electricity and drinking water), • lease of assets and commercial space. • trading in mineral fertilizers, • trading in crop protection chemicals, • purchase and sale of feed grains and food grains, AGROCHEM PUŁAWY • trading in certified seeds, Sp. z o.o. • trading in concentrated fodders and complete mixed feeds, • purchase and distribution of agricultural produce, • fertilizer blending. • construction and erection works, REMZAP Sp. z o.o. • mechanical, construction and electrical repairs of production units. • construction and process engineering design, urban planning, PROZAP Sp. z o.o. • purchase and sale of R&D, conceptual, analytical and pre-design products for development, upgrade and execution of investment processes related to production units.

• manufacture of hop granulates and extracts, • sale of plant extracts, SCF Natural • contracted processing of hops, Sp. z o.o. • laboratory services, • rental of storage space.

15 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Equity-accounted investees Bałtycka Baza Masowa • handling, storage and packing of goods, Sp. z o.o. • ship mooring. Other subsidiaries • trading and food services, STO-ZAP Sp. z o.o. • manufacture of beverages,

• cleaning services.

4. Activities of the Group companies 4.1. Financial results Statement of comprehensive income A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000)

Item Jan 1 – Jun 30 2019** Jan 1 – Jun 30 2018* Change

1 2 3 4=(2/3) Operating income 1,728,152 1,549,860 111.5% Operating expenses -1,402,436 -1,440,607 97.4% Operating profit/(loss) 325,716 109,253 298.1% EBITDA 438,961 204,424 214.7% Profit/(loss) before tax *** 286,021 120,101 238.2% Net profit/(loss) 225,760 95,522 236.3% *restated

** including: the effect of implementation of IFRS 16 Leases as of January 1st 2019, using the modified retrospective approach, without restating comparative data as at the date of initial application of the new standard. *** Effect on profit/(loss) before tax – one-off non-monetary items, including: • as at June 30th 2018 – value of Zakłady Azotowe Chorzów S.A. shares – a PLN 8.2m impairment loss on shares in Zakłady Azotowe Chorzów S.A. was recognised under finance costs in the statement of comprehensive income; • as at June 30th 2019 – value of Zakłady Azotowe Chorzów S.A. shares – a PLN 39.2m impairment loss on shares in Zakłady Azotowe Chorzów S.A. was recognised under finance costs in the statement of comprehensive income.

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000)

Item Jan 1 – Jun 30 2019** Jan 1 – Jun 30 2018* Change

1 2 3 4=(2/3) Operating income 1,958,886 1,766,679 110.9% Operating expenses -1,650,283 -1,681,315 98.2% Operating profit/(loss) 308,603 85,364 361.5% EBITDA 430,881 189,552 227.3% Profit/(loss) before tax *** 307,639 106,185 289.7% Net profit/(loss) 247,938 85,665 289.4% *restated

** including: the effect of implementation of IFRS 16 Leases as of January 1st 2019, using the modified retrospective approach, without restating comparative data as at the date of initial application of the new standard. *** Effect on profit/(loss) before tax – one-off non-monetary items, including: • as at June 30th 2018 – a PLN 6.8m impairment loss on property, plant and equipment and intangible assets of the Organic Products Department at Zakłady Azotowe Chorzów S.A. disclosed in the company’s statement of comprehensive income (as other expenses);

16 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

• as at June 30th 2019 – a PLN 7.8m impairment loss on assets allocated to the Other Activities cash-generating unit (excluding the Organic Products Department) at Zakłady Azotowe Chorzów S.A. disclosed in the company’s statement of comprehensive income (as other expenses), and consolidation adjustments: a PLN 17.4m impairment loss on perpetual usufruct of land.

Geographical structure of revenue A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Revenue Change Amount Structure Amount Structure Domestic sales 1,103,544 63.8% 920,669 59.4% 119.9% Export sales 616,633 35.7% 622,695 40.2% 99.0% Revenue 1,720,177 99.5% 1,543,364 99.6% 111.5% Other income 7,975 0.5% 6,496 0.4% 122.8% Operating income 1,728,152 100.0% 1,549,860 100.0% 111.5%

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Revenue Change Amount Structure Amount Structure Domestic sales 1,311,424 67.0% 1,121,621 63.5% 116.9% Export sales 638,801 32.6% 637,826 36.1% 100.2% Revenue 1,950,225 99.6% 1,759,447 99.6% 110.8% Other income 8,661 0.4% 7,232 0.4% 119.8% Operating income 1,958,886 100.0% 1,766,679 100.0% 110.9%

Year on year, in January 1st–June 30th 2019, revenue: • of Grupa Azoty Zakłady Azotowe Puławy S.A. increased by PLN 176.8m (or 11.5%), with revenue from domestic sales up by PLN 182.9m (or 19.9%), and export revenue down by PLN 6.1m (or 1.0%); • of the Grupa Azoty Zakłady Azotowe Puławy Group rose by PLN 190.8m (10.8%), with revenue from domestic sales up by PLN 189.8m (16.9%) and export revenue – up by PLN 1.0m (0.2%). Revenue by the Group’s key product categories A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Fertilizers – main products 964,064 56.0% 770,939 50.0% 125.1% Chemicals – main products 658,452 38.3% 666,579 43.2% 98.8% Other sales 97,661 5.7% 105,846 6.8% 92.3% Total revenue 1,720,177 100.0% 1,543,364 100.0% 111.5%

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Fertilizers – main products 1,090,799 55.9% 866,140 49.2% 125.9%

17 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure Chemicals – main products 683,098 35.0% 692,575 39.4% 98.6% Other sales 176,328 9.1% 200,732 11.4% 87.8% Total revenue 1,950,225 100.0% 1,759,447 100.0% 110.8%

Year on year, in January 1st–June 30th 2019: • At Grupa Azoty Zakłady Azotowe Puławy S.A.: − revenue from sales of main fertilizer products increased by PLN 193.1m (25.1%), mainly on higher selling prices of nitrogen fertilizers; − revenue from sales of main chemical products decreased by PLN 8.1m (1.2%), mainly on lower selling prices of melamine and caprolactam, partly offset by higher selling prices of urea and higher sales volumes of NOXy®; − revenue from other sales fell by PLN 8.2m (7.7%), mainly as a result of additional volumes of natural gas sales in H1 2018, partly offset by additional sales of urea (merchandise) in H1 2019 and higher volumes of ammonia sales. • At the Grupa Azoty PUŁAWY Group: − revenue from sales of main fertilizer products increased by PLN 224.7m (25.9%), mainly on higher selling prices of fertilizers; − revenue from sales of main chemical products decreased by PLN 9.5m (1.4%), mainly on lower selling prices of melamine and caprolactam, partly offset by higher selling prices of urea and higher sales volumes of NOXy® ; − revenue from other sales fell by PLN 24.4m (12.2%), mainly as a result of additional volumes of natural gas sales in H1 2018 and lower sales of grains.

Costs by nature of expense A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) Jan 1 – Jun 30 2019* Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Depreciation/amortisation of non- 112,931* 8.2% 94,882 6.7% 119.0% current assets Raw materials and consumables used 837,579 60.9% 927,032 65.2% 90.4% Services 147,066 10.7% 149,837 10.5% 98.2% Employee benefits expense 223,140 16.2% 198,146 13.9% 112.6% Taxes and charges 37,901 2.8% 33,855 2.4% 112.0% Other costs 16,423 1.2% 18,019 1.3% 91.1% Total costs by nature of expense 1,375,040 100.0% 1,421,771 100.0% 96.7%

18 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 2019* Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Depreciation/amortisation of non- 121,910* 7.8% 103,852 6.4% current assets 117.39% Raw materials and consumables used 946,959 60.6% 1,025,794 63.5% 92.31% Services 165,341 10.6% 177,828 11.0% 92.98% Employee benefits expense 268,498 17.2% 244,922 15.2% 109.63% Taxes and charges 42,430 2.7% 39,483 2.5% 107.46% Other costs 18,324 1.1% 22,282 1.4% 82.24% Total costs by nature of expense 1,563,462 100.0% 1,614,161 100.0% 96.86%

Costs by function of expense attributable to continuing operations A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) Jan 1 – Jun 30 2019* Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Cost of products sold 1,167,247 83.2% 1,196,803 83.1% 97.5% Cost of merchandise and materials sold 26,583 1.9% 37,091 2.6% 71.7% Administrative expenses 89,205 6.4% 87,736 6.1% 101.7% Distribution costs 111,852 8.0% 112,509 7.8% 99.4% Other expenses 7,549 0.5% 6,468 0.4% 116.7% Total operating expenses 1,402,436* 100.0% 1,440,607 100.0% 97.4%

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 2019* Jan 1 – Jun 30 2018 Change Item Amount Structure Amount Structure Amount 1 2 3 4 1 2 Cost of products sold 1,290,309 78.2% 1,316,172 78.3% 98.0% Cost of merchandise and materials sold 89,999 5.5% 109,672 6.5% 82.1% Administrative expenses 106,743 6.5% 108,891 6.5% 98.0% Distribution costs 129,412 7.8% 132,651 7.9% 97.6% Other expenses** 33,820 2.0% 13,929 0.8% 242.8% Total operating expenses 1,650,283* 100.0% 1,681,315 100.0% 98.2%

* including: the effect of implementation of IFRS 16 Leases as of January 1st 2019, using the modified retrospective approach, without restating comparative data as at the date of initial application of the new standard. ** Other expenses were affected by the following impairment losses: • as at June 30th 2018 – a PLN 6.8m impairment loss on property, plant and equipment and intangible assets of the Organic Products Department at Zakłady Azotowe Chorzów S.A. disclosed in the company’s statement of comprehensive income (as other expenses); • as at June 30th 2019 – a PLN 7.8m impairment loss on assets allocated to the Other Activities cash-generating unit (excluding the Organic Products Department) at Zakłady Azotowe Chorzów S.A. disclosed in the company’s statement of comprehensive income (as other expenses), and consolidation adjustments: a PLN 17.4m impairment loss on perpetual usufruct of land. 19 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Structure of the Grupa Azoty Zakłady Azotowe PUŁAWY Group’s net profit/(loss) (PLN ’000) Jan 1 – Mar Apr 1 – Jun 30 Apr 1 – Jun Jan 1 – Jun 30 Jan 1 – Jun Change Item Change 31 2019** 2019** 30 2018* 2019** 30 2018*

1 2 3 4=2/3 5 6 7 8=6/7 Grupa Azoty Zakłady Azotowe Puławy 165,560 60,200 4,457 1350.7% 225,760 95,522 236.3% S.A. (197) (222) (215) 103.3% PROZAP Sp. z o.o. (419) (477) 87.8% (970) 2,210 1,201 184.0% REMZAP Sp. z o.o. 1,24 0 1,308 94.8% (87) (261) (227) 115.0% SCF Natural Sp. z o.o. (348) (77) 451.9% (2,147) (10,915) (9,352) 116.7% Zakłady Azotowe Chorzów S.A.**** (13,062) (11,696) 111.7% 6,022 4,240 (623) - GZNF Fosfory Sp. z o.o. 10,262 426 2408.9 % 1,878 (1,644) (7,340) 22.4% AGROCHEM PUŁAWY Sp. z o.o. 234 (9,138) - (59) - Elektrownia Puławy Sp. z o.o.*** (59) - 170,059 53,608 (12,158) - Group ’s net profit/(loss) 223,667 75,809 295.0% (2,117) 26,388 11,572 228.0% Co nsolidation adjustments **** 24,271 11,158 217.5% Group ’s net profit/(loss) attributable 168,159 81,053 129 62831.8% 249,212 86,746 287.3% to owners of the Parent Net profit/(loss) attributable to non - (217) (1,057) (715) 147.8% (1,274) (1,081) 117.9% controlling interests 167,942 79,996 (586) - Group ’s net profit/(loss) 247,938 85,665 289.4% *restated

** including: the effect of implementation of IFRS 16 Leases as of January 1st 2019, using the modified retrospective approach, without restating comparative data as at the date of initial application of the new standard. *** Elektrownia Puławy Sp. z o.o. was deleted from the National Court Register on January 2nd 2019.

**** Effect of the following impairment losses: • as at June 30th 2018 – a PLN 6.8m impairment loss on property, plant and equipment and intangible assets of the Organic Products Department at Zakłady Azotowe Chorzów S.A. disclosed in the company’s statement of comprehensive income (as other expenses); • as at June 30th 2019 – a PLN 7.8m impairment loss on assets allocated to the Other Activities cash-generating unit (excluding the Organic Products Department) at Zakłady Azotowe Chorzów S.A. disclosed in the company’s statement of comprehensive income (as other expenses), and consolidation adjustments: a PLN 17.4m impairment loss on perpetual usufruct of land.

Related-party transactions between the Parent and subsidiaries In H1 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. did not conclude any transactions with related parties other than on arm’s length terms.

Structure of the total value of related-party transactions Subsidiary/associate Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018

PROZAP Sp. z o.o. 4.12% 7.12% REMZAP Sp z o.o. 25.36% 27.23% STOZAP Sp z o.o. 2.89% 2.56% BAŁTYCKA BAZA MASOWA Sp. z o.o. 2.72% 3.26% Grupa Azoty KOLZAP Sp. z o.o. *) - 9.24% Grupa Azoty KOLTAR Sp. z o.o. **) 7.03% 0.00% TECHNOCHIMSERWIS S.A. 0.00% 0.00% Elektrownia Puławy Sp. z o.o. ***) 0.00% 0.01% GZNF Fosfory Sp. z o.o. 7.34% 5.49% AGROCHEM PUŁAWY Sp. z o.o. 50.41% 44.88%

20 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Structure of the total value of related-party transactions Subsidiary/associate Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018

Zakłady Azotowe Chorzów S.A. 0.15% 0.21% SCF Natural Sp. z o.o. 0.00% 0.00% Total 100.00% 100.00%

* A change of the company’s name from CTL KOLZAP Sp. z o.o. to Grupa Azoty KOLZAP Sp. z o.o. was registered in the National Court Register on May 15th 2018.

** On August 1st 2018, a merger of Grupa Azoty KOLZAP Sp. z o.o. of Puławy (the other acquiree) and Grupa Azoty KOLTAR Sp. z o.o. of Tarnów (the acquirer) was registered in the National Court Register.

*** Elektrownia Puławy Sp. z o.o. was deleted from the National Court Register on January 2nd 2019.

Main items of assets A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) June 30th 2019** June 30th 2018* Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Non-current assets, including: 3,088,091 67.2% 2,722,127 66.1% 113.4% Property, plant and equipment 2,445,594 53.2% 2,161,730 52.5% 113.1% Usufruct rights to land 0 0.0% 744 0.0% 0.0% Right-of-use assets 211,680 4.6% 0 0.0% - Intangible assets 42,347 0.9% 42,729 1.0% 99.1% Investments in equity instruments 275,854 6.0% 394,750 9.6% 69.9% other 112,616 2.4% 122,174 3.0% 92.2% Current assets, including: 1,510,608 32.8% 1,394,804 33.9% 108.3% Inventories 311,340 6.8% 314,082 7.6% 99.1% Other financial assets 87,239 1.9% 0 0.0% - Trade and other receivables 398,402 8.7% 471,511 11.5% 84.5% Cash and cash equivalents 441,879 9.6% 475,561 11.6% 92.9% Property rights 244,345 5.3% 124,231 3.0% 196.7% other 27,403 0.6% 9,419 0.2% 290.9% Total assets 4,598,699 100.0% 4,116,931 100.0% 111.7% *restated

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) June 30th 2019** June 30th 2018* Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Non-current assets, including: 3,068,554 64.1% 2,616,251 61.1% 117.3% Property, plant and equipment 2,604,803 54.4% 2,356,909 55.0% 110.5% Usufruct rights to land 0 0.0% 72,793 1.7% 0.0% Right-of-use assets 286,328 6.0% 0 0.0% - Intangible assets 50,555 1.1% 52,105 1.2% 97.0% Investments in equity instruments 1,064 0.0% 1,064 0.0% 100.0% other 125,804 2.6% 133,380 3.1% 94.3% Current assets, including: 1,721,773 35.9% 1,667,503 38.9% 103.3% 21 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

June 30th 2019** June 30th 2018* Item Change Amount Structure Amount Structure Inventories 401,771 8.4% 404,709 9.4% 99.3% Other financial assets 90,289 1.9% 2,011 0.0% 4489.8% Trade and other receivables 487,073 10.2% 554,314 12.9% 87.9% Cash and cash equivalents 470,319 9.8% 572,342 13.4% 82.2% Property rights 244,345 5.1% 124,231 2.9% 196.7% other 27,976 0.6% 9,896 0.2% 282.7% Total assets 4,790,327 100.0% 4,283,754 100.0% 111.8% *restated

Year on year, as at June 30th 2019: • At Grupa Azoty Zakłady Azotowe Puławy S.A.: − total assets rose by 11.7% (or PLN 481.8m); − non-current assets accounted for 67.2% of total assets, i.e. PLN 366.0m (or 13.4%) more, due mainly to a PLN 283.9m increase in property, plant and equipment and a PLN 211.7m increase in right-of-use assets, identified following implementation at the Company, as of January 1st 2019, of IFRS 16 Leases , without restating comparative data; − current assets accounted for 32.8% of total assets, i.e. PLN 115.8m (or 8.3%) more, due mainly

to a PLN 120.1m increase in property rights (including mainly CO 2 emission allowances). − • At the Grupa Azoty PUŁAWY Group: − total assets rose by 11.8% (or PLN 506.6m); − non-current assets accounted for 64.1% of total assets, i.e. PLN 452.3m (or 17.3%) more, due mainly to a PLN 247.9m increase in property, plant and equipment and a PLN 286.3m increase in assets under perpetual usufruct rights to land, identified following implementation at the Group, as of January 1st 2019, of IFRS 16 Leases , without restating comparative data; − current assets accounted for 35.9% of total assets, i.e. PLN 54.3m (or 3.3%) more, due mainly to a PLN 120.1m increase in property rights at the Parent.

Main items of equity and liabilities A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) June 30th 2019** June 30th 2018* Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Equity 3,394,547 73.8% 3,185,494 77.4% 106.6% Debt, including: 1,204,152 26.2% 931,437 22.6% 129.3% Non-current liabilities 481,967 10.5% 254,564 6.2% 189.3% Current liabilities 722,185 15.7% 676,873 16.4% 106.7% Total equity and liabilities 4,598,699 100.0% 4,116,931 100.0% 111.7% *restated

22 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000)

June 30th 2019** June 30th 2018* Change Item Amount Structure Amount Structure Amount 1 2 3 4 1 2 Equity 3,418,295 71.4% 3,196,405 74.6% 106.9% Debt, including: 1,372,032 28.6% 1,087,349 25.4% 126.2% Non-current liabilities 532,028 11.1% 291,596 6.8% 182.5% Current liabilities 840,004 17.5% 795,753 18.6% 105.6% Total equity and liabilities 4,790,327 100.0% 4,283,754 100.0% 111.8% *restated

Year on year, as at June 30th 2019: • At Grupa Azoty Zakłady Azotowe Puławy S.A.: − Equity increased by PLN 209.1m (6.6%), but its share in the financing of assets decreased by 3.6pp due to a disproportionately higher share of borrowings; − borrowings increased by PLN 272.7m (29.3%), including a PLN 227.4m (89.3%) rise in non- current liabilities and a PLN 45.3m (6.7%) rise in current liabilities, due mainly to implementation at the Company, as of January 1st 2019, of IFRS 16 Leases , without restating comparative data . • At the Grupa Azoty PUŁAWY Group: − the share of equity in the financing of assets was 71.4%, having decreased by 4.2pp; − equity increased by PLN 221.9m (or 6.9%), due to an increase in retained earnings; − borrowings increased by PLN 284.7m (26.2%), including a PLN 240.4m (82.5%) rise in non- current liabilities and a PLN 43.3m (5.6%) rise in current liabilities, due mainly to implementation at the Group, as of January 1st 2019, of IFRS 16 Leases , without restating comparative data.

Main items of liabilities A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) June 30th 2019** June 30th 2018* Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Total liabilities 1,204,152 100.0% 931,437 100.0% 129.3% Current liabilities, including: 722,185 60.0% 676,873 72.7% 106.7% trade and other payables 631,460 52.4% 623,903 67.0% 101.2% other financial liabilities 26,312 2.2% 370 0.04% 7,111.4% other 90,725 7.5% 52,970 5.7% 171.3% Non-current liabilities, including: 481,967 40.0% 254,564 27.3% 189.3% employee benefits expense 149,134 12.4% 135,916 14.6% 109.7% Provisions (including deferred tax liability) 62,710 5.2% 60,302 6.5% 104.0%

23 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

June 30th 2019** June 30th 2018* Item Change Amount Structure Amount Structure other financial liabilities 171,138 14.2% 465 0.05% 36,803.9% other 270,123 22.4% 58,346 6.3% 463.0% *restated

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000)

June 30th 2019** June 30th 2018* Change Item Amount Structure Amount Structure Amount 1 2 3 4 1 2 Total liabilities 1,372,032 100.0% 1,087,349 100.0% 126.2% Current liabilities, including: 840,004 61.2% 795,753 73.2% 105.6% trade and other payables 662,607 48.3% 664,886 61.1% 99.7% other financial liabilities 27,325 2.0% 2,888 0.3% 946.2% other 177,397 12.9% 130,867 12.0% 135.6% Non-current liabilities, including: 532,028 38.8% 291,596 26.8% 182.5% employee benefits expense 161,641 11.8% 147,092 13.5% 109.9% Provisions (including deferred tax liability) 66,636 4.9% 2,352 0.2% 2833.2% other financial liabilities 204,243 14.9% 851,036 78.3% 24.0% other 303,751 22.1% 142,152 13.1% 213.7% *restated

‘Other financial liabilities’ as a new separate item of the statement of financial position in the category of current and non-current liabilities is a result of the implementation, as of January 1st 2019, of IFRS 16 Leases using the modified retrospective approach, without restating comparative data as at the date of initial application. Based on a series of analyses, the Company has identified areas affected by IFRS 16. The analyses covered finance leases, operating leases, other lease contracts, supply of merchandise from units dedicated to Grupa Azoty Zakłady Azotowe Puławy Group companies, as well as usufruct rights to land acquired and granted to Grupa Azoty Zakłady Azotowe Puławy Group companies. The contracts were analysed to identify assets and to determine whether the Grupa Azoty Zakłady Azotowe Puławy Group companies have the right to control the assets during the contract term. First-time adoption of IFRS 16 resulted in recognition of the right of use and lease liabilities of approximately PLN 242.6m as at January 1st 2019. Following the implementation of IFRS 16, as at January 1st 2019 the amount of the asset under perpetual usufruct to land was PLN 323.5m, and the amount of the liability (‘other financial liabilities’) was PLN 247.4m. For a description of changes between January 1st and June 30th 2019 disclosed in the statement of financial position as a result of the implementation of IFRS 16 at the Grupa Azoty Zakłady Azotowe Puławy Group, see Note 13 to the financial statements.

24 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Selected items of the statement of cash flows A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) Jan 1 – Jun 30 Jan 1 – Jun 30 Item Change 2019 2018* 1 2 3 4=2/3 Net cash from/(used in) operating activities 246,844 141,370 174.6% Net cash from/(used in) investing activities (204,024) (9,643) 2,115.8% Net cash from/(used in) financing activities (41,526) (86,077) 48.2% Net change in cash and cash equivalents 1,294 45,650 2.8% Cash and cash equivalents at beginning of the period 440,745 428,555 102.8% Cash and cash equivalents at end of the period, including: 442,039 474,205 93.2% - restricted cash 0 0 - *restated B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 Jan 1 – Jun 30 Item Change 2019 2018* 1 2 3 4=2/3 Net cash from/(used in) operating activities 211,415 73,436 287.9% Net cash from/(used in) investing activities (293,229) 25,872 -1,133.4% Net cash from/(used in) financing activities (16,836) (62,140) 27.1% Net change in cash and cash equivalents (98,650) 37,168 -265.4% Cash and cash equivalents at beginning of the period 569,062 533,839 106.6% Cash and cash equivalents at end of the period, including: 470,412 571,007 82.4% - restricted cash 56,181 2,069 2715.4% *restated

Financial ratios A. Grupa Azoty Zakłady Azotowe Puławy S.A. Ratio Jan 1 – Jun 30 2019** Jan 1 – Jun 30 2018* EBIT margin 18.9% 7.1% EBITDA margin 25.5% 13.2% ROS (Return on Sales) 13.1% 6.2% ROA (Return on Assets) 4.9% 2.3% ROCE (Return on Capital Employed) 8.4% 3.2% ROE (Return on Equity) 6.7% 3.0% Quick ratio 1.7 1.6 Current ratio 2.1 2.1 Working capital (PLNm) 788.4 717.9 Working capital to total assets 17.1% 17.4% Total debt ratio 26.2% 22.6% Net debt (PLNm) -331.7 -474.7 Debt/EBITDA 0.45 0.00 Debt-to-equity ratio 35.5% 29.2% *based on restated data

25 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group Ratio Jan 1 – Jun 30 2019** Jan 1 – Jun 30 2018* EBIT margin 15.8% 4.9% EBITDA margin 22.1% 10.8% ROS (Return on Sales) 12.7% 4.9% ROA (Return on Assets) 5.2% 2.0% ROCE (Return on Capital Employed) 7.8% 2.4% ROE (Return on Equity) 7.3% 2.7% Quick ratio 1.6 1.6 Current ratio 2.0 2.1 Working capital (PLNm) 881.8 871.8 Working capital to total assets 18.4% 20.4% Total debt ratio 28.6% 25.4% Net debt (PLN m) -248.4 -497.0 Debt/EBITDA 0.72 0.41 Debt-to-equity ratio 40.1% 34.0% *based on restated data

Ratio formulas: • EBIT margin = EBIT / net revenue • EBITDA margin = EBITDA / net revenue • ROS = (net profit (loss)/net revenue) • ROA = (net profit (loss)/total assets) • ROCE = EBIT / assets - current liabilities • ROE = (net profit (loss)/equity) • Quick ratio = ((current assets - inventories)/current liabilities) • Current ratio = current assets / current liabilities • Working capital = current assets - current liabilities • Working capital to total assets = working capital / total assets • Total debt ratio = total debt / total assets • Net debt = bank borrowings and other debt instruments (classified in non-current and current liabilities) - (cash and cash equivalents + other current financial assets from short-term deposits maturing in more than three months) • Debt (interest-bearing liabilities: bank borrowings and other debt instruments classified in current and non-current liabilities)/EBITDA • Debt-to-equity ratio = total liabilities / equity

Year on year, in January 1st–June 30th 2019: • all profitability ratios significantly improved, both at Grupa Azoty Zakłady Azotowe Puławy S.A. and the Grupa Azoty Zakłady Azotowe Puławy Group; • quick and current ratios remain at safe levels despite the implementation of a large number of investment projects; • Grupa Azoty Zakłady Azotowe Puławy S.A.’s and the Grupa Azoty Zakłady Azotowe Puławy Group’s working capital rose by, respectively, PLN 70.5m (9.8%) and PLN 10.0m (1.1%); • the share of working capital in total assets decreased mainly as a result of a disproportionate (relative to equity) increase in total assets following the implementation of IFRS 16 Leases ,

26 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

without restating comparative data – at Grupa Azoty Zakłady Azotowe Puławy S.A. the share was down by 0.3pp, and at the Grupa Azoty Zakłady Azotowe Puławy Group – down by 2pp; • net debt remained negative, indicating an excess of cash over liabilities, despite the implementation, as of January 1st 2019, of IFRS 16 Leases, including Grupa Azoty Zakłady Azotowe Puławy S.A.’s net debt of PLN (-)331.7m, up by PLN 143.0m, and the Grupa Azoty Zakłady Azotowe Puławy Group’s net debt of PLN (-)248.4m, up by PLN 248.6m; • the adverse changes in total debt ratio (%), equity to debt ratio, and debt/EBITDA ratio resulted mainly from changes disclosed in the statement of financial position following the implementation of IFRS 16 Leases , without restating comparative data .

4.2. Key feedstock and raw materials - market situation and supply sources Natural gas In H1 2019, the prices of natural gas in Europe plummeted. From the beginning of 2019, the price of natural gas fell by over 55%, down to EUR 9.13/MWh at the end of June 2019 on the German exchange, reflecting mainly the mild winter in Europe and Asia combined with an oversupply of LNG on global markets. Other factors included exceptionally high stock levels and the falling prices of crude oil and coal. According to IHS Energy, in the first half of 2019 the average price of gas in Europe: • under long-term contracts – amounted to approximately EUR 5.75/MMBtu, having decreased by about 2.38% year on year and by about 14.18% on H2 2018; • in spot transactions – amounted to EUR 4.97/MMBtu, having decreased by about 21.11% year on year and by about 32.66% on H2 2018. In H2 2019, the average price of natural gas is expected to fall: • under long-term contracts – to approximately EUR 5.26/MMBtu; • in spot transactions – to approximately EUR 4.38/MMBtu. The total gas trading volume on the Day-Ahead Market (DAM) of the Polish Power Exchange in H1 2019 was 8,936,435 MWh, down by about 19.35% year on year. Prices of gas traded on the Polish Power Exchange were correlated with those prevailing on Western markets, but were on average higher by EUR 1.75/MWh than in Germany. The highest monthly weighted average price of natural gas (PLN 103.69 per one MWh) traded on the Day-Ahead Market was recorded in January 2019, while the lowest (PLN 48.04 per one MWh) – in June 2019. As at June 30th 2019, the volumes of gas stocks in: • the EU (according to Gas Infrastructure Europe) was 72.97% of the available storage capacity (2018: 48.89%), including almost 82% in Germany, which – if the current injection rate is maintained, may result in gas storage facilities being filled to 100% of the capacity as early as in August 2019; • in Poland – 66.96% of the capacity (2018: 69.00%). The low prices of gas intensified competition in the energy market. Considering the stable prices of emission allowances, gas again became an attractive alternative to coal-based power generation. The trend is likely to continue in the long term as LNG imports may soon increase further (an additional 175 million tonnes of LNG are expected to be delivered to the market by December 2022, compared with 282 million tonnes in January 2016), and Russia will seek to carve out its share of the European market.

27 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

In the second half of 2019, the gas oversupply and high levels of gas stocks will likely be a significant driver of gas prices in Europe.

Supplies of natural gas to Grupa Azoty Zakłady Azotowe Puławy S.A. The main supplier of natural gas to Grupa Azoty Zakłady Azotowe Puławy S.A. in H1 2019 was Polskie Górnictwo Naftowe i Gazownictwo S.A. (PGNiG S.A.). Gas was purchased from the main supplier under a Framework Agreement between PGNiG S.A. and Grupa Azoty Group companies. In H1 2019, approximately 5% of gas supplies to Grupa Azoty Zakłady Azotowe Puławy S.A. were purchased from sources other than PGNiG S.A. In H1 2019, charges for gas transmission were as follows: • over the national grid – as set in Gaz-System S.A.’s Gas Fuel Transmission Tariff No. 12, effective from January 1st 2019; • through the Yamal pipeline – as set in EuRoPol GAZ S.A.’s tariff for the transmission of high- methane natural gas, effective from January 1st 2019. Steam coal In the first half of 2019, the average price of ARA coal (calorific value of 6,000 kcal), according to IHS Energy, approximated USD 66.75/tonne and: • decreased by 23.92% year on year (USD 87.74 per tonne), mainly on lower prices of crude oil and gas; • fell by 30.36% (USD 95.85/tonne) on the second half of 2018 due to a seasonal decrease in consumption during summer (especially in Q2 2019) and the continued decline in gas prices. The continuing downward trend in the prices of coal is a correction of its record-high prices that peaked in the fourth quarter of 2018. According to the International Energy Agency, global demand for coal will remain stable in the coming months (with trends varying by region). Supplies of coal to Grupa Azoty Zakłady Azotowe Puławy S.A. In the first half of 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. purchased hard coal under a long- term agreement with Lubelski Węgiel Bogdanka S.A. Grupa Azoty Zakłady Azotowe Puławy S.A. also purchased coal from Silesian mines. Coal purchase prices paid by Grupa Azoty Zakłady Azotowe Puławy S.A. in H1 2019 were some 10% higher than a year earlier. The situation prevailing on global markets did not directly affect the prices of coal purchased by Grupa Azoty Zakłady Azotowe Puławy S.A., as it paid fixed prices it had negotiated in previous periods for the entire year in which the relevant agreements were in effect. Electricity Movements in the spot prices of electricity are driven by such factors as the supply and demand levels, weather conditions, developments on the coal and CO2 emission allowances markets, and cross-border capacities. Spot prices of electricity are also markedly affected by the presence of renewable energy sources, mainly wind power generation.

In H1 2019, the total volume of all trades executed on the electricity spot and futures markets was 97,213,671 MWh, i.e. an over 2% increase year on year, of which:

28 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

• the trading volume on the futures market was 80,308,832 MWh, down by approximately 1.58% year on year; • the trading volume on the Day-Ahead Market (DAM) was 16,875,947 MWh, i.e. 23.52% more than the year before. In the first half of 2019, the average monthly prices of electricity on the spot market were much higher in relation to the same period of the previous year. In H1 2019, the average spot price of electricity was PLN 230.75/MWh, having increased by 14.4% year on year, due mainly to higher prices of CO 2 emission allowances. In H1 2019, the average price of CO 2 emission allowances was approximately EUR 24/tonne, vs EUR 15/tonne in the corresponding period of the previous year, which represents an increase of approximately 60%. The monthly BASE price of electricity on the markets operated by the Polish Power Exchange, calculated as the volume-weighted average from all DAM trades, was PLN 256.15/MWh in June 2019, i.e. PLN 12.72 (or 5.23%) more than in the previous month.

Supplies of electricity to Grupa Azoty Zakłady Azotowe Puławy S.A. In H1 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. purchased electricity under annual contracts executed for 2019 with the main electricity suppliers, with additional purchases made on the spot market and in transactions executed on the Polish Power Exchange, depending on the price and current production levels. The President of the Energy Regulatory Office approved the PSE S.A. Tariff: • effective from January 1st 2019 – for electricity with respect to transition charge and RES charge (in connection with the Act Amending the Excise Tax Act and Certain Other Acts of December 28th 2018); • on January 25th 2019 – for electricity with respect to the cogeneration charge; • on March 22nd 2019 – for electricity with respect to all other charges. Compared with the previous tariff, the new Tariff: • introduced a cogeneration charge of PLN 1.58/MWh; • maintained the RES charge at PLN 0.00/MWh; • significantly reduced the transition charge. On April 15th 2019, the European Commission announced that Poland’s state aid in the form of a cogeneration surcharge reduction for energy-intensive users had been approved. The rates of transmission charges set in the Electricity Tariff for 2019 will cause an approximately 11% decrease in transmission costs. The electricity transmission rates and prices paid by Grupa Azoty Zakłady Azotowe Puławy S.A. are based on PSE S.A.’s Electricity Tariff, approved annually by the President of the Energy Regulatory Office. New legal regulations applicable to electricity prices The Act Amending the Excise Tax Act and Certain Other Acts (the so-called Electricity Act) of December 28th 2018, amended on February 21st 2019 and June 13th 2019, imposes an obligation to reduce electricity prices for end users in 2019 to the 2018 level. The price reductions and compensation related to purchased/sold electricity, as specified in the Electricity Act, are determined for different customer groups for H1 and H2 2019. For the time being, given the absence of an implementing regulation to the Act, Grupa Azoty Zakłady Azotowe Puławy S.A. is unable to determine whether the prices of electricity purchased for its own 29 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

needs as an industrial user will change. In the first half of 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. applied the provisions of the Act to tariff prices for electricity supplied to end users.

Benzene In H1 2019, the average benzene prices in Europe ranged between EUR 485 and EUR 680 per tonne, having risen in Q2 2019 relative to Q1 2019. Key drivers of the price increase in Q2 2019 included higher prices of crude oil and stronger supply/demand fundamentals. The supply of benzene was slightly limited due to maintenance shutdowns, as well as technical issues affecting some crackers and refineries. The contract price of benzene (EUR 485/tonne in January 2019) was the lowest since May 2009. In the first half of 2019, the benzene market was influenced by the falling prices of crude oil, a global oversupply, and upgrades carried out by benzene processing companies. Compared with the second half of 2018, benzene prices fell: • in Asia – by USD 172/tonne (22.1%) (spot prices ranging between USD 557–624/tonne); • in Europe – by USD 165/tonne (20.2%) (contract prices ranging between USD 552–758/tonne); in EUR-denominated transactions – by EUR 129/tonne (18.3%) (contract prices between EUR 485–680/tonne); • in the US – by USD 187/tonne (22.8%) (contract prices ranging between USD 548–701/tonne). Compared with the same period of 2018, benzene prices fell: • in Asia – by USD 256/tonne (29.6%); • in Europe – by USD 243/tonne (27.2%); in EUR-denominated transactions – by EUR 161/tonne (21.8%); • in the US – by USD 279/tonne (30.6%). The prices of benzene will probably increase in the coming months of 2019 in Europe and the US due to the following factors: • improved demand from the benzene processing industry; • maintenance shutdowns at refineries nearing completion; • rising crude oil prices.

30 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Benzene prices in Europe (Contract EUR/tonne) 1 050

950

850

750

650

550

450 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Wood Mackenzie Chemicals Benzene prices in Asia (Spot FOB NEA USD/tonne) 1 050

950

850

750

650

550

450 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Wood Mackenzie Chemicals

31 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Benzene prices in US (Contract FOB USD/tonne) 1 050

950

850

750

650

550

450 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Wood Mackenzie Chemicals

Benzene prices on international markets 1 100 1 000 900 800 700 600 500 400 I 2016 I 2017 I 2018 I 2019 II 2016 II 2017 II 2018 II 2019 X 2016 X 2017 X 2018 V 2016 V 2017 V 2018 V 2019 III 2016 III 2017 III 2018 III 2019 IX 2016 XI 2016 IX 2017 XI 2017 IX 2018 XI 2018 IV 2016 IV 2016 VI IV 2017 IV 2017 VI IV 2018 IV 2018 VI IV 2019 IV 2019 VI XII 2016 XII 2017 XII 2018 VII 2016 VII VII 2017 VII VII 2018 VII VIII 2016 VIII VIII 2017 VIII VIII 2018 VIII

Benzene Asia Spot FOB (NEA) USD/t Benzene USA Contract FOB USD/t Benzene Europe Contract USD/t Benzene Europe Contract EUR/t

Source: Wood Mackenzie Chemicals

In subsequent periods, the Chinese benzene market will depend on imports, which are expected to grow in Q3 2019 as most of the country’s stocks have been used up. The trade war between the United States and China may largely affect sentiment in the region. In Europe, the prices of benzene are likely to go up as manufacturers will seek to improve margins. In the US, benzene prices may start to trend downwards given an expected supply increase in that region. According to ICIS, 1 2020 will see a rise in benzene prices as crude oil prices go up, driven by changes on the oil market resulting from the IMO 2020 2 fuel regulations.

1 ICIS – Chemical Industry News & Chemical Market Intelligence 2 IMO 2020 – the International Maritime Organization was established to improve environmental performance of international shipping. IMO 2020 is an update of existing regulations applicable to fuels used by the shipping industry . 32 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Supplies of benzene to Grupa Azoty Zakłady Azotowe Puławy S.A. In the first half of 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. purchased benzene under long- term framework contracts, also using its own rolling stock. By optimally diversifying supply sources and trade partnerships with the region’s major benzene producers, the Group has secured safe and efficient supplies.

Sulfur and sulfuric acid In the first half of 2019, the liquid sulfur market was not susceptible to price reductions due to stable prices of sulfuric acid. According to Fertecon data (Sulphur Price Indicator Liquid), in H1 2019 the average price of liquid sulfur (NWE Europe and Benelux) was USD 158/tonne, an increase of 5.3% relative to H2 2018. Global and European prices of liquid sulfur are expected to stabilise in the second half of 2019.

Supplies of sulfur to Grupa Azoty Zakłady Azotowe Puławy S.A. The demand of the Group companies for liquid sulfur is satisfied with Grupa Azoty’s own sulfur resources and supplies from petrochemical companies.

In the first half of 2019: • the prices of sulfuric acid increased; • the average price of sulfuric acid rose by USD 27/tonne (55.10%) year on year; • at the end of H1 2019, the average price of sulfuric acid fell, to USD 47/tonne, reflecting a supply of sulfuric acid on global markets; • in Poland, the supply of sulfuric acid remained stable. In the second half of 2019: • the average price of sulfuric acid will probably decline on global markets; • strong demand for sulfuric acid is expected to continue on the Polish market and, consequently, the profitability of sulfuric acid sales is expected to grow. Sulfur and sulfuric acid price chart 200 180 160 140 120 100 80 USD/tonne 60 40 20 0 lis18 lis17 lip 18 lip lip 17 lip lut 19 lut lut 18 lut sie 18 sie sie 17 sie sty 19 sty sty 18 sty cze 19 cze cze 18 cze cze 17 cze gru gru 18 gru gru 17 kwi 19 kwi kwi 18 kwi kwi 17 kwi paź 18 paź paź 17 paź wrz 18 wrz wrz 17 wrz maj 19 maj maj 18 maj maj 17 maj mar 19 mar mar 18 mar

Sulfuric acid – FOB Bulk, NW Europe Spot/FOB Belgium WFM Sulfur NW Europe CPT Fertecon

33 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Source: In-house data.

Phosphate rock and phosphoric acid In the first half of 2019, according to reports by World Fertilizer Market: • phosphate rock prices – ranged from USD 90/tonne to USD 95/tonne (transaction prices), and were unchanged relative to the second half of 2018; • phosphoric acid prices – ranged from USD 823/tonne to USD 865/tonne (CFR NW Europe SPOT) and were higher by 3.7% relative to the second half of 2018. Potassium chloride In the first half of 2019, the average price of potassium chloride (according to Fertecon Potash Report) increased by approximately 6% on the average price in H2 2018. Potassium chloride prices are expected to stabilise in the second half of 2019.

Animal fats In the first half of 2019, the Grupa Azoty Zakłady Azotowe Puławy Group did not purchase animal fats following the suspension (for the period of 12 months from October 31st 2018) of production of oleochemicals due to low market prices of the products.

4.3. Certificates of electricity origin Year on year, in the first half of 2019 the average market prices of property rights were as follows: • PMOZE_A green certificates 3– the average price was PLN 125.34/MWh, having risen by 89.14%; • PMOZE-BIO blue certificates 4 – the average price was PLN 300.00/MWh, having fallen by about 5%; • PMGM-2018 yellow certificates 5– the average price was PLN 111.08/MWh, having fallen by 5.47%; • PMMET-2018 purple certificates 6– the average price was PLN 55.30/MWh, having fallen by 0.18%; • PMEC-2018 red certificates 7– the average price was PLN 8.36/MWh, having fallen by 14.69%; • PMEF white certificates 8– the average price was PLN 275.27/toe, having fallen by 59.79%.

In H1 2019, Grupa Azoty Zakłady Azotowe Puławy S.A.: • purchased property rights under certificates of origin for electricity from renewable energy sources (PMOZE_A and PMOZE-BIO) , property rights under certificates of origin for cogenerated electricity (PMMET-2018 and PMGM-2018), and property rights under energy efficiency certificates (PMEF-2018) on the Polish Power Exchange (PPX) in order to meet the obligation to redeem certificates of origin for 2018; • sold property rights under energy efficiency certificates (PMEF and PMEF-2018);

3PMOZE_A, known as green certificates – property rights to certificates of origin of electricity from a renewable source, with the period of generation specified in the certificate beginning not later than on February 28th 2009. 4 PMOZE-BIO, known as blue certificates – property rights under certificates of origin of electricity generated from agricultural biogas as of July 1st 2016. 5PMGM, known as yellow certificates – property rights to certificates of origin of electricity generated in gas-fired cogeneration units or cogeneration units with a total installed capacity of up to 1 MW. 6 PMMET, known as purple certificates – property rights to certificates of origin of electricity from high-efficiency cogeneration units fired with methane released and captured during underground mining operations in active, inactive or decommissioned coal mines, or gas obtained from biomass processing, within the meaning of Art. 2.1.2 of the Act on Biocomponents and Liquid Biofuels. 7 PMEC, known as red certificates – property rights to certificates of origin of electricity generated in the other cogeneration units. 8 PMEF, known as white certificates – property rights under energy efficiency certificates.

34 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Grupa Azoty Zakłady Azotowe Puławy S.A. regularly purchases and sells property rights in intraday trades on the Polish Power Exchange.Thus, the average purchase price of property rights paid by the Company results from market prices quoted in the period covered by the purchase and redemption obligation. By January 30th 2019, as required by the Energy Efficiency Act, Grupa Azoty Zakłady Azotowe Puławy S.A. – due to the fact that it purchased electricity and natural gas on the Polish Power Exchange in 2018 – submitted relevant representations on the number of and method of covering the costs of white certificates to a brokerage house. According to the representations, the Company surrendered for redemption the property rights under PMEF-2018 held in its account. By way of the President of the Energy Regulatory Office’s decision of March 25th 2019, the white certificates were redeemed. Moreover, in order to fulfil the 2018 redemption obligation imposed on industrial users and suppliers of electricity, the Company filed with the Energy Regulatory Office applications for redemption of the other certificates, i.e. PMOZE, PMOZE-BIO, PMGM-2018, PMMET-2018, PMEC-2018 and PMEF. Having submitted relevant declarations to the Energy Regulatory Office by the prescribed deadline, in 2019 Grupa Azoty Zakłady Azotowe Puławy S.A. may purchase and redeem PMOZE_A and PMOZE-BIO certificates for 15% of electricity used for the Company’s own needs versus the statutorily defined limit. Following the entry into force of the Act on the Promotion of Electricity from High-Efficiency Cogeneration of December 14th 2018, as of January 1st 2019 there is no obligation to purchase and redeem property rights for electricity produced in cogeneration units. This obligation has been replaced by a cogeneration surcharge set at PLN 1.58 per one MWh of electricity purchased. On January 13th 2019, Grupa Azoty Zakłady Azotowe Puławy S.A applied for cogeneration certificates for the period July 1st 2018 – December 31st 2018. An annual report together with the original of an accredited body’s opinion was submitted on February 8th 2019. Certificates of origin for the second half of 2018 were granted on April 2nd 2019. 4.4. Greenhouse gas emission allowances In the first half of 2019, the EU ETS market experienced high volatility of EUA prices, the range between the lowest and highest prices reaching around EUR 9. The average emission allowance price in the first half of 2019 was EUR 23.80, while the highest and lowest prices were EUR 27.46 and EUR 18.35, respectively. Another important price driver was the looming Brexit. As of January 1st 2019, the European Commission temporarily suspended the allocation of CO 2 allowances to the UK (given uncertainty over the conditions of the UK’s exit from the EU). The deadline for concluding a Brexit deal with the EU has been postponed until the end of October 2019. If such agreement is signed, the issuance and auctions of the UK’s allowances will be resumed, but they will not be held until November and December 2019. EUA auctions are organised by the United Kingdom every two weeks. Accordingly, it will probably be impossible to sell some 75 million of the UK’s EUA allowances during as few as four auctions, and so the balance will likely be carried forward to 2020. On May 15th 2019, the European Commission announced a market surplus (in terms of the total number of outstanding EUA allowances in 2018). Their number was 1.6549 billion. The published data means that the volume of allowances to be auctioned (from September 2019 to August 2020) will be reduced by 397.178 million. In H1 2019, the European Commission’s measures referred to above reduced the supply of emission allowances and, consequently, pushed up their prices.

35 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Supplies of CO 2 emission allowances to Grupa Azoty Zakłady Azotowe Puławy S.A. In February 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. received free-of-charge emission allowances for 2,143,500 tonnes, which were credited to its accounts held in the EU Registry. In April 2019, the Company settled its CO 2 emissions for 2018, by redeeming allowances for 3,511,224 tonnes in the EU Registry.

Additionally, in April 2019 Grupa Azoty Zakłady Azotowe Puławy S.A. received CO 2 emission allowances for 419,167 tonnes under the National Investment Plan.

4.5. Manufacturing at the Grupa Azoty Zakłady Azotowe PUŁAWY Group In January 1st−June 30th 2019, the output volumes from the main production units were set to match the trading policy of the Grupa Azoty PUŁAWY Group and the prevailing market conditions.

Main product output dynamics Jan 1 – Jun 30 2019 vs Company Product Jan 1 – Jun 30 2018 • ammonia 101% • nitrogen fertilizers as pure N equivalent 101% Grupa Azoty Zakłady • caprolactam 104% Azotowe Puławy S.A. • melamine 98% • hydrogen peroxide 102% • NOXy® (formerly AdBlue®) 141%

• CSP *) phosphate fertilizers as P 2O5 equivalent 106% • compound fertilizers as N equivalent 134%

GZNF Fosfory • compound fertilizers as P 2O5 equivalent 121%

Sp. z o.o. • compound fertilizers as K 2O equivalent 130% • sulfuric acid as 100% concentration equivalent 104% • sodium bisulfite 109% • calcium nitrate solution 103% Zakłady Azotowe • potassium nitrate 121% Chorzów S.A. • fertilizer blends 131% • liquid and flaked stearin 0%

*) CSP – single nutrient fertilizers, superphosphates

In the first half of 2019, production of liquid and flaked stearin at Zakłady Azotowe Chorzów S.A. remained suspended as prices on the oleochemicals market were still too low.

36 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Output of key products of Grupa Azoty Zakłady Azotowe Puławy S.A. 700

600

500

400

300

200 ‘000 tonnes 100

0 Ammonia PULAN® UAN - RSM ® Total urea Melamina™ CAPROLACTAM™ PULSAR® 2018 2019

4.6. Discussion and analysis of segments’ results The Group Grupa Azoty Zakłady Azotowe Puławy S.A. conducts its business activities within the following segments: Agro, Chemicals, Energy and Other Activities. Revenue from sales to external customers A. Revenue from sales to external customers of Grupa Azoty Zakłady Azotowe Puławy S.A. by segment (PLN ’000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure

1 2 3 4 5 6=(2-4)/4 AGRO 1,013,665 58.9% 807,071 52.3% 25.6% CHEMICALS 661,164 38.4% 670,582 43.4% -1.4% ENERGY 37,044 2.2% 58,124 3.8% -36.3% OTHER ACTIVITIES 8,304 0.5% 7,587 0.5% 9.5% Total revenue 1,720,177 100.0% 1,543,364 100.0% 11.5%

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure

1 2 3 4 5 6=(2 -4)/4 AGRO 1,203,626 61.7% 976,114 55.5% 23.3% CHEMICALS 687,534 35.3% 698,933 39.7% -1.6% ENERGY 38,302 2.0% 59,736 3.4% -35.9% OTHER ACTIVITIES 20,763 1.0% 24,664 1.4% -15.8% Total revenue 1,950,225 100.0% 1,759,447 100.0% 10.8%

37 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

In the period January 1st to June 30th 2019: • the Agro Segment’s revenue from sales to external customers accounted for the largest share (58.9%) of Grupa Azoty Zakłady Azotowe Puławy S.A.’s total external revenue, having increased 6.6pp year on year; the Chemicals Segment’s revenue from sales to external customers accounted for 38.4% of the total external revenue, having decreased by 5.0 pp year on year; • the Agro Segment’s revenue from sales to external customers accounted for the largest share (61.7%) of the Grupa Azoty Zakłady Azotowe Puławy Group’s total external revenue, having increased 6.2pp year on year; the Chemicals Segment’s revenue from sales to external customers accounted for 35.3% of the total external revenue, having decreased 4.4pp year on year. Agro Segment In January 1st–June 30th 2019, the Agro Segment’s EBIT (including intersegment sales) was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 286.3m, compared with PLN 100.8m the year before; • at the Grupa Azoty Zakłady Azotowe PUŁAWY Group – PLN 291.0m, with PLN 91.1m recorded in the same period of the previous year. The main commercial products of the Agro Segment include: • nitrogen fertilizers (N) manufactured at Grupa Azoty Zakłady Azotowe Puławy S.A.: PULAN® (ammonium nitrate), PULREA® and PULGRAN® (urea), RSM® (urea-ammonium nitrate solution) and RSM®S (urea-ammonium nitrate solution with sulfur), PULSAR® (ammonium sulfate), ammonium sulfate from the FGD unit, PULASKA® (nitrogen fertilizer solution with sulfur) and PULGRAN®S (granulated urea with sulfur); • potassium nitrate and calcium nitrate fertilizers, liquid urea, calcium nitrate with boron, RSM®- and RSM®S-based fertilizers, phosphate fertilizers (P) and blends (NP, NK, PK and NPK), including amofoska, agrafoska and Holist® fertilizers, manufactured by other Group companies. Other commercial products of the Agro Segment include: • secondary products manufactured by Grupa Azoty Zakłady Azotowe Puławy S.A.: LIKAM® (ammonia water), ammonia, hydrogen, nitric acid, instrument and process air, carbon dioxide, COOLANT® (dry ice); • certified seed produced by other Group companies. The Agro Segment also sells merchandise (fertilizers, feed, grains and crop protection chemicals) and materials, as well as services. Agro Segment’s external revenue by product group A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Main commercial products 964,064 95.1% 770,939 95.5% 125.1% Other commercial products 37,047 3.7% 31,859 4.0% 116.3% Segment’s other revenue 12,554 1.2% 4,273 0.5% 293.8% Total 1,013,665 100.0% 807,071 100.0% 125.6%

38 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Main commercial products 1,090,799 90.6% 866,140 88.7% 125.9% Other commercial products 38,016 3.2% 32,790 3.4% 115.9% Segment’s other revenue 74,811 6.2% 77,184 7.9% 96.9% Total 1,203,626 100.0% 976,114 100.0% 123.3%

Share of exports in Agro Segment’s product groups A. Grupa Azoty Zakłady Azotowe Puławy S.A. Share of exports Item Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Main commercial products 29.0% 30.1% Other commercial products 8.2% 10.8% Segment’s other revenue 0.0% 0.0% Segment’s total revenue 27.9% 29.2%

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group Share of exports Item Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Main commercial products 26.3% 27.3% Other commercial products 8.0% 10.5% Segment’s other revenue 2.9% 2.2% Segment’s total revenue 24.3% 24.8%

In January 1st–June 30th 2019, the Agro Segment’s revenue from sales to external customers was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 1,013.7m, up PLN 206.6m (25.6%) year on year, including: − a PLN 193.1m increase in revenue from sales of main commercial products (mainly on higher selling prices of nitrogen fertilizers); − a PLN 5.2m increase in revenue from sales of other commercial products (driven mainly by higher ammonia sales volumes); − a PLN 8.3m increase in other revenue (mainly on the back of additional sales of merchandise (urea) recorded in H1 2019); • at the Grupa Azoty PUŁAWY Group – PLN 1,203.6m, an increase of PLN 227.5m (23.3%) year on year, including: − a PLN 224.7 increase in revenue from sales of main commercial products (mainly on higher selling prices of fertilizers); − a PLN 5.2m increase in revenue from sales of other commercial products (driven mainly by higher ammonia sales volumes); − a PLN 2.4m decrease in other revenue. Cost of products, merchandise and materials sold to external customers of the Agro Segment was: 39 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

• at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 614.2m, up PLN 0.2m (0.03%) year on year; • at the Grupa Azoty PUŁAWY Group – PLN 776.6m, up PLN 11.2m (1.5%) year on year. Distribution costs of the Agro Segment were: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 87.8m, i.e. PLN 1.5m (or 1.7%) less year on year;

• at the Grupa Azoty PUŁAWY Group – PLN 101.9m, i.e. PLN 4.3m (4.1%) less year on year. Profit earned by the Agro Segment on sales to external customers was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 311.7m, up PLN 208.0m (200.5%) year on year; • at the Grupa Azoty Puławy Group – PLN 325.1m, up PLN 220.6m (221.1%) year on year.

Chemicals Segment In January 1st 2019–June 30th 2019, the Chemicals Segment’s EBIT (including intersegment sales) was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 129.4m, compared with PLN 98.2m in the first half of 2018; • at the Grupa Azoty Puławy Group – PLN 132.2m, compared with PLN 90.6m recorded in the same period of 2018. The main products of the Chemicals Segment include: • liquid and flaked caprolactam, melamine, PULREA® (urea), PULNOX® (urea solutions), hydrogen peroxide and NOXy® produced by Grupa Azoty Zakłady Azotowe Puławy S.A.; • sulfuric acid, sodium bisulfite, potassium nitrate (industrial and food grades), calcium nitrate for technical applications, and products obtained from fatty acids processing, produced by other Grupa Azoty Zakłady Azotowe PUŁAWY Group companies. Other commercial products of the Chemicals Segment include secondary products manufactured by the Segment’s core units. The Chemicals Segment also sells merchandise, materials, and services.

Chemicals Segment’s external revenue by product group A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Main commercial products 658,452 99.6% 666,579 99.4% 98.8% Other commercial products 2,712 0.4% 4,003 0.6% 67.7% Segment’s other revenue 0 0.0% 0 0.0% 0.0% Total 661,164 100.0% 670,582 100.0% 98.6%

40 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Main commercial products 683,098 99.4% 692,575 99.1% 98.6% Other commercial products 2,807 0.4% 4,070 0.6% 69.0% Segment’s other revenue 1,629 0.2% 2,288 0.3% 71.2% Total 687,534 100.0% 698,933 100.0% 98.4%

Share of exports in Chemicals Segment’s product groups A. Grupa Azoty Zakłady Azotowe Puławy S.A. Share of exports Item Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Main commercial products 50.7% 58.1% Other commercial products 0.0% 0.0% Segment’s other revenue 0.0% 0.0% Segment’s total revenue 50.5% 57.7%

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group Share of exports Item Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Main commercial products 50.6% 57.1% Other commercial products 0.0% 0.0% Segment’s other revenue 10.3% 19.7% Segment’s total revenue 50.3% 56.6%

In January 1st–June 30th 2019, the Chemicals Segment’s revenue from sales to external customers was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 661.2m, down PLN 9.4m (1.4%) year on year, including: − revenue from sales of main commercial products fell by PLN 8.1m (mainly on lower selling prices of melamine and caprolactam, partially offset by higher selling prices of urea and higher sales volumes of NOXy®); − revenue from sales of other commercial products decreased by PLN 1.3m; • at the Grupa Azoty Puławy Group – PLN 687.5m, i.e. PLN 11.4m (1.6%) less year on year, including: − revenue from sales of main commercial products fell by PLN 9.5m (mainly on lower selling prices of melamine and caprolactam, partially offset by higher selling prices of urea and higher sales volumes of NOXy®); − revenue from sales of other commercial products decreased by PLN 1.3m; − other revenue declined by PLN 0.7m. Cost of products, merchandise and materials sold to external customers of the Chemicals Segment was: 41 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

• at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 528.4m, i.e. PLN 21.9m (4.0%) less year on year; • at the Grupa Azoty PUŁAWY Group – PLN 543.5m, i.e. PLN 30.5m (5.3%) less year on year. Distribution costs of the Chemicals Segment were: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 23.9m, up PLN 0.9m (3.9%) year on year; • at the Grupa Azoty PUŁAWY Group – PLN 26.9m, up PLN 1.0m (4.0%) year on year. Profit earned by the Chemicals Segment on sales to external customers was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 108.8m, up PLN 11.5m (11.9%) year on year; • at the Grupa Azoty PUŁAWY Group – PLN 117.2m, up PLN 18.0m (18.2%) year on year.

Energy Segment In January 1st–June 30th 2019, the Energy Segment’s EBIT (including intersegment sales) was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN (-)3.2m, compared with PLN (-)0.2m in the first half of 2018; • at the Grupa Azoty PUŁAWY Group – PLN (-)6.0m, compared with PLN (-)0.8m in the same period the year before. The main commercial products of the Energy Segment include heat and heat carriers. The Energy Segment also sells merchandise and materials (electricity, natural gas, property rights), other forms of energy, and services.

Energy Segment’s external revenue by product group A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Main commercial products 13,516 36.5% 13,856 23.9% 97.5% Other commercial products 841 2.3% 779 1.3% 108.0% Segment’s other revenue 22,687 61.2% 43,489 74.8% 52.2% Total 37,044 100.0% 58,124 100.0% 63.7% B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 2019 Item Jan 1 – Jun 30 2018 Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Main commercial products 13,978 36.5% 14,367 24.1% 97.3% Other commercial products 794 2.1% 779 1.3% 101.9% Segment’s other revenue 23,530 61.4% 44,590 74.6% 52.8% Total 38,302 100.0% 59,736 100.0% 64.1%

42 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

In January 1st–June 30th 2019, the Energy Segment’s revenue from sales to external customers was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 37.0m, i.e. PLN 21.1m (36.3%) less year on year, which resulted, among other factors, from a PLN 20.8m decrease in the Segment’s other revenue (due mainly to additional sales of natural gas recorded in H1 2018); • at the Grupa Azoty PUŁAWY Group – PLN 38.3m, i.e. PLN 21.4m (35.9%) less year on year,

including a PLN 21.1m decline in other revenue (due mainly to additional sales of natural gas recorded in H1 2018). Cost of products, merchandise and materials sold to external customers of the Energy Segment was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 40.6m, i.e. PLN 16.1m (28.4%) less year on year; • at the Grupa Azoty PUŁAWY Group – PLN 41.9m, down by PLN 16.0m (27.7%) on the same period in 2018. Profit earned by the Energy Segment on sales to external customers was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN (-)3.6m, i.e. PLN 4.9m less year on year; • at the Grupa Azoty PUŁAWY Group – PLN (-)3.6m, i.e. PLN 5.3m less than in the first half of 2018. On June 18th 2019, the President of the Energy Regulatory Office issued to Grupa Azoty Zakłady Azotowe Puławy S.A. the following decisions: • to extend the gas fuel distribution licence until July 1st 2030 (Ref. No.: OLB.4112.3.2018.TSi); • to extend the gas fuel trade licences until July 1st 2030 (Ref. No.: OLB.4112.4.2018.TSi).

Other Activities Segment In January 1st–June 30th 2019, the Other Activities Segment’s EBIT (including intersegment sales) was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN (-)11.8m, compared with PLN (-)6.3m in the same period of the previous year; • at the Grupa Azoty PUŁAWY Group – PLN (-)16.6m, compared with PLN (-)11.7m in the first half of 2018. The commercial products in the Other Activities Segment include plastic sacks, plastic film, waste bags, and other materials not allocated to other segments. In addition, the following were allocated to the Other Activities Segment: • sales of other services not allocated to the Agro, Chemicals or Energy Segments; • sales of REMZAP Sp. z o.o., PROZAP Sp. z o.o., and SCF Natural Sp. z o.o. Other Activities Segment’s external revenue by product group A. Grupa Azoty Zakłady Azotowe Puławy S.A. (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Main commercial products 4,435 53.4% 3,250 42.8% 136.5% Segment’s other revenue 3,869 46.6% 4,337 57.2% 89.2% Total 8,304 100.0% 7,587 100.0% 109.5%

43 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group (PLN ‘000) Jan 1 – Jun 30 2019 Jan 1 – Jun 30 2018 Item Change Amount Structure Amount Structure 1 2 3 4 5 6=2/4 Main commercial products 3,554 17.1% 2,722 11.0% 130.6% Segment’s other revenue 17,209 82.9% 21,942 89.0% 78.4% Total 20,763 100.0% 24,664 100.0% 84.2%

In January 1st–June 30th 2019, the Other Activities Segment’s revenue from sales to external customers was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 8.3m, i.e. PLN 0.7m (9.5%) more year on year, including a PLN 1.2m increase in the Segment’s revenue from sales of main commercial products (primarily on larger volumes of plastic film sold); • at the Grupa Azoty PUŁAWY Group – PLN 20.8m, down PLN 3.9m (15.8%) year on year, including: − a PLN 0.8m increase in revenue from sales of main commercial products (primarily on larger volumes of plastic film sold); − a PLN 4.7m decrease in other revenue (primarily on lower sales of REMZAP Sp. z o.o.’s services). Cost of products, merchandise and materials sold to external customers of the Other Activities Segment was: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 12.7m, up PLN 1.5m (13.9%) year on year; • at the Grupa Azoty PUŁAWY Group – PLN 20.4m, i.e. PLN 6.4m (23.9%) less year on year. Distribution costs of the Other Activities Segment were: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN 0.1m, i.e. 6.7% more year on year; • at the Grupa Azoty PUŁAWY Group – PLN 0.6m, up PLN 0.1m (20.6%) year on year. Loss incurred by the Other Activities Segment on sales to external customers: • at Grupa Azoty Zakłady Azotowe Puławy S.A. – PLN (-)4.4m, a decrease of PLN 0.8m (23.1%) year on year;

• at the Grupa Azoty PUŁAWY Group – PLN (-)0.3m, up PLN 2.4m year on year.

4.7. Capital investment In H1 2019, the Grupa Azoty PUŁAWY Group incurred capital expenditure of approximately PLN 184m, including PLN 187m attributable to Grupa Azoty Zakłady Azotowe Puławy S.A. (before adjustments and consolidation eliminations). The projects included growth and maintenance capex involving the construction of new units and upgrade of existing units to improve their efficiency, as well as compliance with environmental laws. Projects were also carried out to replace and upgrade equipment critical for improving product quality, reliability of production units and work conditions. The largest capital investment was made to implement the ‘Unit for manufacture of ammonium nitrate-based granulated fertilizers’ and the

44 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

‘Upgrade of the nitric acid unit and construction of new facilities for nitric acid production, neutralisation and production of new fertilizers based on nitric acid’ projects.

Grupa Azoty Zakłady Azotowe Puławy S.A. Key investment projects

Expenditure Planned Budget Expenditure Project in H1 2019 Description completion PLN ’000 PLN ’000 PLN ’000 date

To raise the efficiency of nitric acid production and to improve the Upgrade of the nitric acid unit and economics of production of nitric acid- construction of new facilities for based fertilizers; Any excess of nitric acid nitric acid production, 695,000 126,447 40,813 will be processed on the new line for the 2024 neutralisation and production of production of speciality fertilizers new fertilizers based on nitric acid (magnesium nitrate, calcium nitrate and potassium nitrate), with a capacity of 600 tonnes per day.

To improve the quality of fertilizers by applying modern mechanical granulation; The key element of the Unit for manufacture of granulated complex is two lines for manufacturing fertilizers based on ammonium 385,000 337,878 45,466 2020 of granulated fertilizers based on nitrate ammonium nitrate melt as the feedstock for granulated ammonium nitrate and calcium ammonium nitrate.

To reconstruct the steam generator, which will become one of the primary Upgrade of OP-215 steam generator generating units along with generators 93,000 12,884 8,079 2020 No. 2 to reduce NOx emissions Nos. 4 and 5, and to bring it into compliance with the new NOx emission standards.

Project completed in the first half of 2019.To enable the use of the existing To increase volume and optimise surplus of raw CO 2 from natural gas production of liquid carbon dioxide 35,262 33,518 3,329 2019 processing to produce additional in the Ammonia Department amounts of liquid carbon dioxide with a concurrent increase of storage capacity.

To increase the efficiency of the unit for To modernise CO 2 absorption in CO 2 absorption in potassium carbonate potassium carbonate solutions – 24,656 1,778 580 solutions to 110%, and to reduce the 2021 Lines II and III of the Gas Pre- consumption of thermal energy and Treatment System electricity.

Purchase and assembly of synthesis To increase ammonia production 24,400 13,207 1,409 2020 gas compressor No. 7 - KS7 capacity and improve process safety.

To improve the technical condition of the circulation water system, to ensure Upgrade of the circulation water reliable supply of water to the cooling 24,100 14,799 702 2020 system in the Ammonia Department systems, and to secure supply of water to new units at the Ammonia Department.

*) Net of adjustments and consolidation eliminations.

45 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Investment decisions by the Parent’s governing bodies In the first half of 2019: • The Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A. approved ten investment projects/projects to purchase of finished goods for a total amount of approximately PLN 1,264.7m; • The Supervisory Board of Grupa Azoty Zakłady Azotowe Puławy S.A. approved three investment projects for a total amount of approximately PLN 1,248.1m.

Approval of the budget for the construction of a coal-fired power generating unit in Puławy and convening of the Extraordinary General Meeting of Grupa Azoty Zakłady Azotowe Puławy S.A. On April 16th 2019, the Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A. passed a resolution to preliminarily accept a bid placed by the consortium of Polimex-Mostostal S.A. of Warsaw, Polimex Energetyka Sp. z o.o. of Warsaw and SBB ENERGY S.A. of Opole in a tender procedure to select the general contractor for the ‘Construction of a coal-fired power generation unit in Puławy’ project, as a basis for taking further steps to execute the project. Three bids were submitted in the tender procedure. The other two were submitted by a consortium headed by Rafako S.A. and a consortium whose leader is PowerChina Nuclear Engineering Company Limited. Of all the bidders, the Consortium best meets the requirements laid down in the tender documentation. An analysis of the bids shows that remuneration under the contract to act as general contractor for the project will not exceed PLN 1.16bn (VAT exclusive). The amount will render it necessary to update the project’s total budget, which, according to the estimates by the Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A., should not exceed PLN 1.2bn (VAT exclusive). On June 26th 2019, the Supervisory Board approved the budget for the ‘Construction of a coal-fired power generation unit in Puławy’ project, with a total value of up to PLN 1,200.0m (VAT exclusive). After the reporting period, on July 23rd 2019, the Extraordinary General Meeting approved the acquisition by Grupa Azoty Zakłady Azotowe Puławy S.A. of non-current assets with a total value of up to PLN 1,200.0m (VAT exclusive) required to implement the ‘Construction of a coal-fired power generation unit in Puławy’ project. • • The Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A. selected the best bid in the tender procedure to select the general contractor for the ‘Construction of a coal-fired power generation unit in Puławy’ project: it was the bid submitted by a consortium of Polimex- Mostostal S.A. of Warsaw, Polimex Energetyka Sp. z o.o. of Warsaw, and SBB ENERGY S.A. of Opole (the “Consortium”), for a price of up to PLN 1,160.0m (VAT exclusive). The project is scheduled to be launched in September 2019, based on an agreement with the Consortium. The new 100 MWe hard coal-fired power generating unit will be built on the premises of the Grupa Azoty Zakłady Azotowe Puławy S.A’s CHP plant, ensuring energy security to the Company, also in view of its planned investments in the fertilizers and chemicals business. The construction of a new power generation unit at Grupa Azoty Zakłady Azotowe Puławy S.A. is the largest power project in the Lublin region and in the entire Grupa Azoty Group. The project execution is expected to take 36 months.

46 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Grupa Azoty Zakłady Azotowe Puławy Group companies

Total Expenditure Planned Budget Project expenditure in H1 2019 Description completion PLN ’000 PLN ’000 PLN ’000 date

GZNF Fosfory Sp. z o.o. To construct a new caustic soda lye unloading facility in the immediate vicinity of the caustic soda lye storage tanks in order to shorten the unloading Upgrade of the caustic 5,150 2,664 15 station-storage tanks and unloading station-ship Q4 2019 soda lye handling unit railway routes for lye handling. The project will result in reduced railway traffic at the bulk product terminal. Upgrade of the fertilizer To maintain production capacity and improve 5,500 881 881 2019 unit agrotechnical quality of compound fertilizers. To enable the provision of handling and storage services for such products as nitrates and ammonium sulfate. The project involved an upgrade of the existing salt warehouse. In order to adapt the terminal to handle calcium ammonium Upgrade of the bulk nitrates, in 2018 work began to upgrade the wagon 7,000 6,509 541 Q3 2019 product terminal unloading facilities as well as the power supply and lighting systems. Furthermore, design documentation was prepared for technical safety equipment supporting the CAN handling operations, to be installed at the existing process unit. Zakłady Azotowe Chorzów S.A. Redevelopment of the sanitary and storm water To remove the system from premises not owned by 572 482 247 Completed sewerage system within Zakłady Azotowe Chorzów S.A. Property 5 area Extension of the potassium nitrate 134 167 100 To connect the crystallisation unit to an interceptor. Q3 2019 crystallisation unit (2018) Reconstruction (upgrade) Construction work is in progress. In its course, the of structural ceilings in need to perform additional works on the steel 380 178 178 Q4 2019 the OPN building structure was identified, and such works were (P5/2019) ordered. PROZAP Sp. z o.o. Purchase of finished Purchase of property, plant and equipment and 377 116 116 2019 goods and services intangible assets. REMZAP Sp. z o.o. Purchase of multi - Completed Purchase of multi-purpose transverse cutting device purpose transverse 432 432 432 on February for production of technical insulation. cutting device 28th 2019 In H1 2019, capital expenditure at the Grupa Azoty PUŁAWY Group companies was as follows: • Zakłady Azotowe Chorzów S.A. – PLN 965 thousand; • GZNF Fosfory Sp. z o.o. – PLN 2,048 thousand; • REMZAP Sp. z o.o. – PLN 526 thousand; • PROZAP Sp. z o.o. – PLN 116 thousand; • SCF Natural Sp. z o.o. – PLN 0 thousand; • AGROCHEM PUŁAWY Sp. z o.o. – PLN 350 thousand.

47 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

4.8. Research and development In H1 2019, the research and development work performed at Grupa Azoty Zakłady Azotowe Puławy S.A. included mainly work on new and development of the existing technologies, as well as improvement of the existing products. The research and development work was largely a continuation or extension of the work carried out in previous periods. Some of the key R&D projects were: 1. KAPROPOL project entitled ‘Development of a new synthesis route for production of ε- caprolactone from cyclohexanone and hydrogen peroxide with the use of chemo-enzymatic catalysis’, implemented by Grupa Azoty Zakłady Azotowe Puławy S.A. under the INNOCHEM programme (Smart Growth Operational Programme – 1.2 POIR) announced by the National Centre for Research and Development in December 2015 (first edition). It aims to develop a commercially and economically viable method of producing ε-caprolactone via a catalytic process. 2. Under the INNOCHEM sectoral programme, Grupa Azoty Zakłady Azotowe Puławy S.A. is implementing a project to develop and implement advanced process controls at the ammonia unit. Its expected outcomes will include reduced consumption of materials (high-methane natural gas as the key production input) and energy intensity of the process, improved process safety and reduction of its environmental impact. 3. The project is carried out as part of the third edition of the sectoral programme BIOSTRATEG. The objective of the project is to develop innovative microbially enriched fertilizers and to assess the effects of their use in microbiological stimulation of soil fertility and productivity. The project is carried out by a consortium of the Research Institute of Horticulture (consortium leader), Grupa Azoty Zakłady Azotowe Puławy S.A., Bohdan Dobrzański Institute of Agrophysics – Polish Academy of Sciences, Institute of Soil Science and Plant Cultivation – State Research Institute, and the New Chemical Syntheses Institute in Puławy. In cooperation with the New Chemical Syntheses Institute, test batches of fertilizers were manufactured and verified for the survival of microorganisms and the stability of new products (including at the Microbiological Laboratory of Grupa Azoty Zakłady Azotowe Puławy S.A.). The new products were released for field experiments. The bio-fertilizers were subject to a range of physical and chemical tests, as well as assessment of their qualitative and quantitative composition. Research is under way to develop an optimum method for the introduction of useful microorganisms into the formulations of the new bio-fertilizers and to select a suitable vehicle for microorganisms with a view to extending their survival rates. 4. Grupa Azoty Zakłady Azotowe Puławy S.A. and its subsidiaries, including GZNF Fosfory Sp. z o.o, are undertaking initiatives to achieve and maximise synergies across common business areas. 5. A green technology research project pursued by Grupa Azoty Zakłady Azotowe Puławy S.A. and focusing on production of organic compounds based on renewable and waste resources (not recyclable in other industries) using bacteria, which will be possible thanks to the use of genetic engineering methods. 6. A project entitled ‘Development of a new type of liquid fertilizers based on phosphate materials of sedimentary origin’, designed to obtain a new type of liquid fertilizers based on phosphate materials of sedimentary origin. The project is carried out by a consortium led by Grupa Azoty Zakłady Chemiczne Police S.A. 7. A project entitled ‘New fertilizers based on nitric acid: CN, MgN, KN, CN-MgN’, aimed at extending product chains and carried out as part of the ‘Upgrade of the nitric acid unit and construction of new facilities for nitric acid production, neutralisation and production of new fertilizers based on 48 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

nitric acid’ project. 8. A project entitled ‘Development of the Grupa Azoty Zakłady Azotowe Puławy Research Laboratory’, where the intermediate institution is the Lublin Agency for the Support of Entrepreneurship. The project aims to make Grupa Azoty Zakłady Azotowe Puławy S.A. able to individually conduct research and development work on fertilizers and biotechnology, two areas of strategic importance for the Company. This will be achieved through extension and further development of the research laboratory.

4.9. Environmental protection and process safety Grupa Azoty Zakłady Azotowe Puławy S.A. Grupa Azoty Zakłady Azotowe Puławy S.A. holds all the certificates, inspection approvals, authorisations, permits and environmental decisions required by law for the conduct of its business. On February 22nd 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. submitted an application to the County Marshal Office for an amendment to its permit relating to production unit capacities and waste management; on April 9th 2019, the application was supplemented by a request concerning adaptation of the CHP plant to the BAT LCP Conclusions. In the first half of 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. concluded agreements for: • the management of ash and slag in 2019–2022; • the extraction of floating fractions of fly ash from a landfill site in 2019–2020. Pro-environmental investment projects (process safety) under way in H1 2019: • Upgrade of steam generator No. 2; • Upgrade of the nitric acid unit and construction of new facilities for nitric acid production.

Grupa Azoty Zakłady Azotowe Puławy Group companies

Zakłady Azotowe Chorzów S.A. Zakłady Azotowe Chorzów S.A. holds all the required environmental decisions and permits, except a permit under the Water Law to discharge wastewater containing substances particularly harmful to the aquatic environment into a sewerage system. An application for the permit was submitted to the Polish Waters State Management Agency in March 2019.

GZNF Fosfory Sp. z o.o. In the first half of 2019, ongoing projects included work related to: • recovery of phosphate from leachate at the phosphogypsum landfill site in Wiślinka. The applied recovery technology has significant environmental implications, as it enables faster restoration of landfill sites, improves the condition of the natural environment, and supports sustainable development by reducing consumption of water and phosphorus from natural sources; • recovery of ash from combustion of sludge classified with waste code 19 01 14. The recovery process is consistent with the sustainable development strategy by reducing the use of natural resources of phosphate ore. Furthermore, the use of ash as a low-cadmium feedstock helps reduce cadmium content in phosphate fertilizers, which is beneficial for the environment and reduces cadmium accumulation in soil .

49 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

In connection with the Minister of the Environment’s Regulation on the amounts of security for claims of February 7th 2019 (Dz. U. of 2019, item 256), GZNF Fosfory Sp. z o.o. will determine the security for claims in respect of treated waste: leachate from the landfill site and ashes from the combustion of sludge. Other companies of the Grupa Azoty Zakłady Azotowe Puławy Group The other Grupa Azoty Zakłady Azotowe PUŁAWY Group companies hold all the certificates, inspection approvals, permits, and environmental decisions required to conduct their business.

4.10. HR policy Employment A. Grupa Azoty Zakłady Azotowe Puławy S.A. Annual average number of employees No. of employees as at Employment Jan 1 – Jun 30 Jan 1 – Jun 30 2019 Jun 30 2019 Jun 30 2018 2018 blue-collar employees 2,248 2,223 2,249 2,228 white-collar employees 1,284 1,276 1,297 1,278 Total 3,532 3,499 3,546 3,506

B. Grupa Azoty Zakłady Azotowe PUŁAWY Group Annual average number of employees No. of employees as at Employment Jan 1 – Jun 30 Jan 1 – Jun 30 2019 Jun 30 2019 Jun 30 2018 2018 blue-collar employees 2,957 2,971 2,967 2,986 white-collar employees 1,707 1,708 1,718 1,722 Total 4,664 4,679 4,685 4,708

Changes in the terms of remuneration in the first half of 2019

At Grupa Azoty Zakłady Azotowe Puławy S.A., May 15th 2019 was the effective date of Supplement No. 33 of April 2nd 2019 to the Collective Bargaining Agreement of March 22nd 2006, concerning new bonus payment terms for employees of Grupa Azoty Zakłady Azotowe Puławy S.A.

In the first half of 2019, no material changes were made to the employment policies of the Grupa Azoty PUŁAWY Group’s subsidiaries.

4.11. Rankings, awards and honours Grupa Azoty Zakłady Azotowe Puławy S.A. In April 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. was awarded the Golden CSR Leaf by the POLITYKA weekly. The highest award in POLITYKA ’s eighth ranking of the most socially responsible and socially involved companies in 2018 was granted by the weekly’s editorial board together with Deloitte and the Responsible Business Forum. In February 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. was honoured by the European Business Institute with a Diamond of Polish Economy 2018 title in the most valuable companies in Poland contest. Grupa Azoty Zakłady Azotowe Puławy S.A. also ranked second in the Diamonds of Polish Economy 2018 ranking of companies operating in the Lublin Province.

50 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Grupa Azoty Zakłady Azotowe Puławy S.A. maintained its previous year’s positions in the ranking lists compiled by the Dziennik Wschodni and Kurier Lubelski dailies. In the Responsible Companies Ranking, Grupa Azoty Zakłady Azotowe Puławy S.A., as a separate company, took its highest spot since the ranking was first published.

Ranking Position Category Published in

Gazeta Finansowa 1,000 Largest Companies in Poland 111 Revenue for 2018 Jun 28 2019 13th Ranking of Socially Responsible Dziennik Gazeta Prawna 6 CSR performance Companies Jun 19-23 2019 13th Ranking of Socially Responsible CSR performance of industrial sector Dziennik Gazeta Prawna 2 Companies companies Jun 19-23 2019 The Gold en 100 List − ranking of the Dziennik Wschodni largest companies of the Lublin 2 Revenue for 2018 Jun 19 2019 Province The Golden 100 List − ranking of the Export revenue for 2018 Dziennik Wschodni largest companies of the Lublin 1 Jun 19 2019 Province The 100 List of the Kurier Lubelski daily Kurier Lubelski − ranking of the largest companies of 2 Revenue for 2018 Jun 13 2019 the Lublin Province The 100 List of the Kurier Lubelski daily Export revenue for 2018 Kurier Lubelski − ranking of the largest companies of 1 Jun 13 2019 the Lublin Province

Grupa Azoty Zakłady Azotowe Puławy Group companies REMZAP Sp. z o.o.

Ranking Position Category Published in The 2018 Golden 100 List – a The Golden 100 List − ranking of the 44 Revenue in 2018 supplement to the Dziennik largest companies of the Lublin Province Wschodni daily of June 19th 2019 The 2018 Golden 10 0 List – a The Golden 100 List − ranking of the Employment − large companies − 25 supplement to the Dziennik largest companies of the Lublin Province workforce of more than 250 in 2018 Wschodni daily of June 19th 2019 The 2018 Golden 100 List – a The Golden 100 List − ranking of the 3 Sector − Construcon supplement to the Dziennik largest companies of the Lublin Province Wschodni daily of June 19th 2019 The 2018 Golden 100 List – a The Golden 100 List − ranking of the 15 Largest employers supplement to the Dziennik largest companies of the Lublin Province Wschodni daily of June 19th 2019 The 2018 Golden 100 List – a The Golden 100 List − ranking of the 14 Revenue growth supplement to the Dziennik largest companies of the Lublin Province Wschodni daily of June 19th 2019 The 100 List of the Kurier Lubelski daily − The 100 Li st of the Kurier Lubelski ranking of the largest companies of the 36 Revenue in 2017 daily – a supplement to Kurier Lublin Province Lubelski of June 13th 2019 The 100 List of the Kurier Lubelski daily − The 100 List of the Kurier Lubelski ranking of the largest companies of the 14 Largest employers daily – a supplement to Kurier Lublin Province Lubelski of June 13th 2019 The 100 List of the Kurier Lubelski daily − The 100 List of the Kurier Lubelski ranking of the largest companies of the 19 Highest profit companies daily – a supplement to Kurier Lublin Province Lubelski of June 13th 2019 The 100 List of the Kurier Lubelski daily − The 100 List of the Kurier Lubelski ranking of the largest companies of the 29 Largest investors daily – a supplement to Kurier Lublin Province Lubelski of June 13th 2019

51 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

5. Financial policy and financial risk management 5.1. Financial liquidity and free cash management Grupa Azoty Zakłady Azotowe Puławy S.A. Grupa Azoty Zakłady Azotowe Puławy S.A. is exposed to liquidity risk understood as the risk of failure to meet its liabilities as they fall due. This risk is connected with a potentially limited access to financial markets, which may result in the Group’s inability to raise financing. The Company manages its liquidity by maintaining a cash position appropriate to the scale of operations, has access to open credit facilities, and has executed a deferred payment service agreement with one of it relationship banks. Deposits of free cash match the liabilities payment cycle. Transactions with longer maturities require approval at the appropriate authority level. In the first half of 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. was fully solvent, with good credit standing. It means that the Company is able to pay its liabilities as they fall due and to maintain and generate free operating cash flows. Free cash deposited in bank accounts is invested by Grupa Azoty Zakłady Azotowe Puławy S.A. in term and overnight deposits (negotiated and automatic) and in the cash pooling scheme of the Grupa Azoty Group companies.

The term deposits bear interest at fixed rates. Cash at banks bears interest at variable rates, which depend on the interest rate for overnight bank deposits on the interbank market. Short-term deposits were placed for various periods, ranging from one day to three months, depending on the current and forecast cash requirements.

Grupa Azoty Zakłady Azotowe Puławy Group companies As at June 30th 2019, the Grupa Azoty Zakłady Azotowe Puławy Group companies had adequate current financial liquidity. None of the bank accounts was subject to judicial or administrative attachment. Their trade payables and public charges were paid when due. Their liquidity ratios remained at safe levels.

5.2. Borrowing agreements Intra-group financing In the first half of 2019, the Intra-Group Financing Agreement executed on April 23rd 2015 by Grupa Azoty S.A., Grupa Azoty Zakłady Azotowe Puławy S.A., Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. and Grupa Azoty Zakłady Chemiczne Police S.A. continued in force. The financing limit, that is the maximum amount of Grupa Azoty S.A.’s financing for Grupa Azoty Zakłady Azotowe Puławy S.A., is PLN 1,000m. In H1 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. did not use any financing under the Intra-Group Financing Agreement.

52 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Loans advanced by Grupa Azoty Zakłady Azotowe Puławy S.A. In January 1st–June 30th 2019, the following loans granted by the Parent were outstanding at the Grupa Azoty PUŁAWY Group:

Repayment As at Jun 30 Borrower Amount Agreement date period 2019

Apr 2 2014 Zakłady Azotowe Chorzów S.A. – PLN 47.0m (Annex 1 of Dec 31 2014, Annex 2 of Dec 20 Dec 31 2023 PLN 23.63m loan agreement 2017)

SCF Natural Sp. z o.o. – loan May 7 2014 PLN 0.60m Jun 30 2022 PLN 0.60m agreement Annex 1 of Dec 27 2016

SCF Natural Sp. z o.o. – loan Jan 16 2017 PLN 1.0m Oct 31 2022 PLN 1.0m agreement Annex 1 of Sep 12 2017

Zakłady Azotowe Chorzów S.A. Zakłady Azotowe Chorzów S.A. is obliged to commence repayment of the loan as of 2021 and to repay the debt in full by December 31st 2023. On January 3rd 2019, the company made a partial repayment of PLN 818.9 thousand.

External financing Grupa Azoty Zakłady Azotowe Puławy S.A. As at June 30th 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. had access to credit facilities totalling PLN 72m, available for the financing of its day-to-day operations. No amounts were drawn under the facilities as at June 30th 2019. In January 1st–June 30th 2019, loans granted by the Parent were outstanding at the Grupa Azoty PUŁAWY Group. On March 5th 2019, Annex 5 was executed to the physical cash pooling agreement of September 20th 2016 with PKO BP S.A. Under the Annex, SCF Natural Sp. z o.o. joined the Agreement with a PLN 4m daily limit. Overdraft limits in bank accounts as at June 30th 2019 Borrowing cost Lender Repayment As at Jun 30 Borrowing amount Non-bank Agreement/annex date period 2019 borrowings Apr 23 2015 (Annex 1 of Dec PKO BP S.A., multi- 1M WIBOR + 23 2015, Annex 2 of Sep 20 purpose credit facility PLN 70m Sep 30 2022 PLN 0.0m margin 2016, Annex 3 of Nov 23 2017, agreement Annex 4 of Jun 29 2018)

Aug 19 2013 (Annex 8 of Aug 19 2013, Annex 9 of Oct 23 2013, Annex 10 of Apr 16 PKO BP S.A., overdraft 1M WIBOR + 2014, Annex 11 of Apr 23 PLN 0m Sep 30 2022 PLN 0.0m facility agreement margin 2015, Annex 12 of Oct 16 2015, Annex 13 of Sep 20 2016, Annex 14 of May 9 2018, Annex 15 of Jun 29 2018)

53 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Borrowing cost Lender Repayment As at Jun 30 Borrowing amount Non-bank Agreement/annex date period 2019 borrowings May 14 2010 (Annex 1 of Oct 22 2010, Annex 2 of Sep 30 2011, Annex 3 of Dec 1 2011, No cost. The Annex 4 of Nov 29 2012, PEKAO S.A., intraday overdraft must be Annex 5 of Nov 29 2013, PLN 2m Nov 30 2019 PLN 0.0m overdraft facility repaid on the same Annex 6 of Nov 28 2014, day. Annex 7 of Nov 30 2015, Annex 8 of Nov 29 2016, Annex 9 of Nov 24 2017, Annex 10 of Nov 29 2018) National Fund for Environmental Protection and Water Management of Warsaw – agreement 3M WIBOR + for co-financing in the PLN 52.5m Sep 12 2018 Mar 31 2028 PLN 0.0m margin form of a loan of the ‘Upgrade of OP-215 steam generator No. 2 to reduce NOx emissions’ project

Grupa Azoty Zakłady Azotowe Puławy Group companies GZNF Fosfory Sp. z o.o.

Borrowing cost Lender Repayment As at Jun 30 Borrowing amount Non-bank Agreement/annex date period 2019 borrowings PKO BP S.A. (overdraft facility PLN 20.0m 1M WIBOR + margin Jun 29 2018 Sep 30 2022 0 sublimit)

Zakłady Azotowe Chorzów S.A.

Lender Borrowing cost Repayment As at Jun 30 Borrowing amount Agreement/annex date Non-bank borrowings period 2019 Oct 1 2010 Annex 11 of Apr 23 2015, Annex 12 of Oct 16 2015 PKO BP S.A. (overdraft Annex 13 of Sep 20 2016 facility sublimit, cash PLN 2.0m 1M WIBOR + margin Sep 30 2022 0 Annex 14 of pooling) May 9 2018 Annex 15 of Jun 29 2018

AGROCHEM PUŁAWY Sp. z o.o.

Borrowing cost Lender Repayment As at Jun 30 Borrowing amount Non-bank Agreement/annex date period 2019 borrowings

PKO BP S.A. (overdraft Oct 1 2010 PLN 30.0m 1M WIBOR + margin Sep 30 2022 PLN 30.0m facility sublimit) Annex of Jun 29 2018

PKO BP S.A. (physical Oct 1 2010 PLN 69.0m 1M WIBOR + margin Sep 30 2022 PLN 30.69m cash pooling) Annex of Jun 29 2018

54 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

REMZAP Sp. z o.o.

Borrowing cost Lender Repayment As at Jun 30 Borrowing amount Non-bank Agreement/annex date period 2019 borrowings PKO BP S.A. (overdraft Oct 1 2010 (Annex 15 of facility sublimit, cash PLN 3.0m 1M WIBOR + margin Sep 30 2022 0 Jun 29 2018) pooling)

On March 22nd 2019, the credit facility agreement of up to PLN 2m, concluded in 2017 with Millennium Bank S.A., expired.

SCF Natural Sp. z o.o.

Borrowing cost Lender Repayment As at Jun 30 Borrowing amount Non-bank Agreement/annex date period 2019 borrowings

PKO BP S.A. (physical PLN 4.0m 1M WIBOR + margin Feb 1 2019 Sep 30 2022 PLN 3.1m cash pooling)

Lease contracts at the Grupa Azoty PUŁAWY Group Grupa Azoty Zakłady Azotowe Puławy S.A. In the first half of 2019, at Grupa Azoty Zakłady Azotowe Puławy S.A.: • no new lease contracts were concluded; • there were five effective contracts executed with mLeasing Sp. z o.o. and one lease assignment agreement with Prime Car Management S.A.; • the ‘Company Fleet’ lease contracts and maintenance contracts (signed under Agreement for the Transfer of Rights and Obligations No. 1424/T/CESJA concluded with Idea Fleet S.A.) expired in March 2019; the vehicle (AUDI passenger car) was returned to the lessor.

Grupa Azoty Zakłady Azotowe Puławy Group companies In H1 2019, Zakłady Azotowe Chorzów S.A. executed three lease contracts for three passenger cars, for an aggregate initial value of PLN 96.4 thousand. In April and May 2019, two lease contracts for two passenger cars expired at PROZAP Sp. z o.o. The company purchased these cars for future use. As at June 30th 2019: • SCF NATURAL Sp. z o.o. was making lease payments for two passenger cars. The total net value of the leased assets is PLN 178.6 thousand; • GZNF Fosfory Sp. z o.o. had eight lease contracts, for eight vehicles worth PLN 3,143.49 thousand in aggregate.

55 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Access to EU funds The Group’s EU funding agreements in the first half of 2019: In the first half of 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. was party to the following agreements: A. co-financing in the form of a loan: Agreement of September 12th 2018 with the National Fund for Environmental Protection and Water Management for co-financing the ‘Upgrade of OP-215 steam generator No. 2 to reduce NO x emissions’ project. The project cost is PLN 84.1m. The loan amount if PLN 52.5m. Term of the loan: January 2nd 2019 to June 30th 2028. The grace period ends on June 29th 2021. The loan is secured by a blank promissory note. As at June 30th 2019, the outstanding balance was PLN 0. B. Co-financing in the form of a grant: • with the National Fund for Environmental Protection and Water Management (NFOŚiGW): − Agreement on co-financing of the ‘Construction of a flue gas desulfurisation unit using the wet ammonia method at Zakłady Azotowe Puławy S.A.’ project, concluded on September 30th 2009 – co-financing granted: PLN 20.0m; co-financing disbursed as at June 30th 2019: PLN 20.0m;

− Agreement on co-financing of the ‘Construction of NO x reduction units on the OP-215 boilers No. 4 and No. 5’ project, concluded on May 4th 2011 – co-financing granted: PLN 3.5m; co- financing disbursed as at June 30th 2019: PLN 3.5m; • with the National Centre for Research and Development: − Agreement of December 2nd 2013 on implementation and financing of the ‘Optimisation of Drilling Waste Management Methods’ project carried out by a Consortium (five members) under the ‘Blue Gas − Polish Shale Gas’ programme. The total amount of co-financing granted to the Consortium was PLN 11,074 thousand, including PLN 5.0m for Grupa Azoty Zakłady Azotowe Puławy S.A. The amount disbursed as at June 30th 2019 was PLN 3.7m, as specified in the request for final payment; − Agreement of June 2nd 2015 on implementation and financing of the ‘Support for low- emission agriculture capable of adapting to climate change now and within the 2030 and 2050 timeframes’ project, implemented under the BIOSTRATEG Natural Environment, Agriculture and Forestry Programme. The total amount of co-financing granted to the Consortium is PLN 10.58m, including PLN 0.12m granted to Grupa Azoty Zakłady Azotowe Puławy S.A. and paid by June 30th 2019; − Agreement with the National Centre for Research and Development on December 6th 2016 on co-financing of the ‘Development of a new synthesis route for production of ε- caprolactone from cyclohexanone and hydrogen peroxide with the use of chemo-enzymatic catalysis’ project under the Smart Growth Operational Programme. The total amount of co- financing granted was PLN 2.0, of which PLN 0.88m was disbursed as at June 30th 2019; − Agreement on co-financing of the ‘Development and implementation of advanced process controls (APC) for the ammonia unit’ project under the Smart Growth Operational Programme, executed on February 2nd 2017. The total amount of co-financing granted was PLN 1.1m, of which PLN 0.67m was disbursed as at June 30th 2019; − Agreement of November 29th 2017 on co-financing of the ‘Development of a technology for the production of potassium thiosulfate using exhaust gases from the sulfuric acid plant and production of potassium thiosulfate-based compound liquid

56 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

fertilizers’ project. The total amount of co-financing for the consortium is PLN 2.0m, including PLN 1.4m for Grupa Azoty Zakłady Azotowe Puławy S.A. (consortium leader), of which PLN 0.28m was disbursed as at June 30th 2019, and PLN 0.6m for GZNF Fosfory Sp. z o.o. (consortium member), of which PLN 0 was disbursed as at March 31st 2019; − Agreement on co-financing of the ‘Development of innovative technologies for microbial mineral fertilizers’ project, signed on December 18th 2017 and implemented under the BIOSTRATEG Natural Environment, Agriculture and Forestry Programme. The agreement was concluded by the Skierniewice Consortium. The total amount of co-financing for the consortium is PLN 16.4m, including PLN 0.28m for Grupa Azoty Zakłady Azotowe Puławy S.A., of which PLN 0.0040m was disbursed as at June 30th 2019; − Agreement of August 3rd 2018 on co-financing of the ‘Green technology for production of succinic acid from renewable and waste materials’ project under the Smart Growth Operational Programme. The agreement was concluded by the Wrocław Consortium. The total amount of co-financing for the consortium is PLN 6.5m, including PLN 2.1m for Grupa Azoty Zakłady Azotowe Puławy S.A., of which PLN 0.11m was disbursed as at June 30th 2019; − Agreement of March 12th 2019 on co-financing of the ‘Development of new type of liquid fertilizers based on phosphate materials of sedimentary origin’ project carried out by a consortium with Grupa Azoty Zakłady Chemiczne Police S.A. The total amount of co-financing for the consortium is PLN 7.4m, including PLN 0.8m for Grupa Azoty Zakłady Azotowe Puławy S.A., of which PLN 0m was disbursed as at June 30th 2019; • with the Polish Agency for Enterprise Development: – Agreement of November 14th 2018 on co-financing of the ‘Eastern Business Accelerator’ project carried out by the Puławski Park Technologiczny Consortium. The total amount of co- financing for the consortium is PLN 17.3m, including PLN 0.8m for Grupa Azoty Zakłady Azotowe Puławy S.A., of which PLN 0m was disbursed as at June 30th 2019; • with the Lublin Agency for the Support of Entrepreneurship: − Agreement of November 20th 2018 on co-financing of the ‘Development of the Grupa Azoty Zakłady Azotowe Puławy Research Laboratory’ project under the Lublin Province Regional Operational Programme. The total amount of co-financing for Grupa Azoty Zakłady Azotowe Puławy S.A. is PLN 3.0m, of which PLN 0 was disbursed as at June 30th 2019; • with the Ministry of Investments and Development: – Agreement of January 31st 2019 on co-financing of the ‘Strengthening the potential of Grupa Azoty Zakłady Azotowe Puławy S.A. in the R&D&I area’ project under the Smart Growth Operational Programme. The total amount of co-financing for Grupa Azoty Zakłady Azotowe Puławy S.A. was PLN 20.6m, of which PLN 0 was disbursed as at June 30th 2019.

5.3. Guarantees and sureties issued Grupa Azoty Zakłady Azotowe Puławy S.A. As at June 30th 2019, the amount of all sureties and guarantees provided by Grupa Azoty Zakłady Azotowe Puławy S.A. and its subsidiaries to support bank borrowings and other debt instruments exceeded 10% of Grupa Azoty Zakłady Azotowe Puławy S.A.’s equity. In H1 2019, no guarantees were provided by or at the request of Grupa Azoty Zakłady Azotowe Puławy S.A.

57 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

On March 20th 2019, the PLN 315,978.88 bank guarantee issued by PKO BP S.A. expired. The beneficiary of the guarantee was the Head of Fiscal Administration Chamber. The guarantee, issued under a bank guarantee agreement with PKO BP S.A., was provided as security for the agreement for the organisation of an audiotext lottery. In January 1st–June 30th 2019, a bank guarantee of PLN 363,500.00 was valid. It had been issued on December 5th 2018 by PKO BP S.A. at the request of Grupa Azoty Zakłady Azotowe Puławy S.A., until March 26th 2020, in favour of the Head of the Fiscal Administration Chamber. The guarantee, issued under a bank guarantee agreement with PKO BP S.A., was provided as security for a audiotext lottery agreement.

Sureties and guarantees in force at Grupa Azoty Zakłady Azotowe Puławy S.A. as at June 30th 2019

Total surety/gua rantee Relationship Secured obligor Beneficiary amount as Issue date Expiry date Financial terms between the Purpose at the parties reporting date PKO BP S.A. Surety (acting as the provided for a Grupa Azoty Credit Facility fee calculated S.A., the Parent Agent as a of Grupa Azoty Security for credit Grupa Azoty S.A. representing also PLN 1.2bn Jun 29 2018 Jun 29 2028 percentage of Zakłady facility the other the surety Azotowe lenders, i.e. BGK amount Puławy S.A. S.A., BZ WBK effectively S.A., ING BŚ S.A.) granted Surety provided for a Grupa Azoty fee calculated S.A, the Parent as a of Grupa Azoty Security for Grupa Azoty S.A. PKO BP S.A. PLN 124m Jun 29 2018 Sep 30 2025 percentage of Zakłady overdraft facility the surety Azotowe amount Puławy S.A. effectively granted Surety provided for a Grupa Azoty fee calculated S.A, the Parent as a Security for multi- of Grupa Azoty Grupa Azoty S.A. PKO BP S.A. PLN 96m Jun 29 2018 Sep 30 2028 percentage of purpose credit Zakłady the surety facility Azotowe amount Puławy S.A. effectively granted Guarantee Grupa Azoty provided for a S.A, the Parent fee calculated PLN of Grupa Azoty Security for credit Grupa Azoty S.A. EIB May 28 2015 May 28 2029 as a 220.0m Zakłady facility percentage of Azotowe the guarantee Puławy S.A. amount

58 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Total surety/gua rantee Relationship Secured obligor Beneficiary amount as Issue date Expiry date Financial terms between the Purpose at the parties reporting date The guarantee expires upon Grupa Azoty the expiry of S.A., the Parent the security Guarantee of Grupa Azoty term, which provided for a Zakłady ends upon fee calculated Azotowe Security for credit Grupa Azoty S.A. EBRD PLN 60.0m May 28 2015 repayment as a Puławy S.A., facility of the debt percentage of EBRD, a under the the guarantee shareholder of credit facility amount Grupa Azoty agreement, S.A. concluded for a period of 10 years. Guarantee Grupa Azoty provided for a S.A., the Parent fee calculated of Grupa Azoty Security for credit Grupa Azoty S.A. EIB EUR 58.0m Jan 25 2018 May 5 2031 as a Zakłady facility percentage of Azotowe the guarantee Puławy S.A. amount The guarantee expires upon Grupa Azoty the expiry of S.A., the Parent the security Guarantee of Grupa Azoty term, which provided for a Zakłady ends upon fee calculated PLN Azotowe Security for credit Grupa Azoty S.A. EBRD Jul 26 2018 repayment as a 200.0m Puławy S.A., facility of the debt percentage of EBRD, a under the the guarantee shareholder of credit facility amount Grupa Azoty agreement, S.A. concluded for a period of 10 years.

Bank guarantees issued at the request of Grupa Azoty Zakłady Azotowe Puławy S.A. and effective as at June 30th 2019

Total Relationship surety/guarantee Financial Principal Beneficiary Issue date Expiry date between the Purpose amount as at the terms parties reporting date

Guaran tee provided for a fee security for Head of Fiscal calculated Dec 5 payment of GA Puławy Administration PLN 363,500.00 Mar 26 2020 as a none 2018 audiotext lottery Chamber percentage prizes of the guarantee amount

59 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Guarantees and sureties received by Grupa Azoty Zakłady Azotowe Puławy S.A. under sale and purchase agreements in the period January 1st–June 30th 2019 and effective as at June 30th 2019 Sureties and guarantees received in the first half of 2019 9: • under sale agreements, at the Grupa Azoty Zakłady Azotowe Puławy Group, amounted to PLN 1,044.10 thousand (including above PLN 500 thousand: PLN 744.10 thousand), including PLN 1,044.10 thousand at Grupa Azoty Zakłady Azotowe Puławy S.A.; (including above PLN 500 thousand: PLN 744.10 thousand); • under purchase agreements, at the Grupa Azoty Zakłady Azotowe Puławy Group, amounted to PLN 19,807.06 thousand (including above PLN 500 thousand: PLN 9,234.41 thousand), including PLN 19,800.16 thousand at Grupa Azoty Zakłady Azotowe Puławy S.A. (including above PLN 500 thousand: PLN 9,234.41 thousand). Grupa Azoty Zakłady Azotowe Puławy Group companies Surety provided by AGROCHEM PUŁAWY Sp. z o.o. and effective as at June 30th 2019

Total Relationship Secured Beneficiary surety/guarantee Issue date Expiry date Financial Purpose between the obligor amount as at the terms parties reporting date Currently, there is no sureties for Bank PLN 536 relationship bank loans of Individual Spółdzielczy w Jun 1 2015 May 15 2035 none thousand between the a then- Więcborku obligor and employee the company On June 1st 2015, the Management Board of AGROCHEM PUŁAWY Sp. z o.o. issued to its then- employee a surety for a bank loan. The loan was secured with a promissory note of up to PLN 536 thousand. The surety agreement was signed on June 1st 2015 for an indefinite term and does not contain any financial terms. The relevant loan agreement was concluded for a period until May 15th 2035. Despite termination of the borrower’s employment with AGROCHEM PUŁAWY Sp. z o.o., the surety continues in force and cannot be revoked by the company. Guarantees and sureties provided by REMZAP Sp. z o.o. and effective as at June 30th 2019

Total Relationship Beneficiary surety/guarantee Issue date Expiry date Purpose Secured obligor Financial terms between the amount as at the parties reporting date Grupa Azoty blank Zakłady PLN 2,048.0 Aug 21 related contractual Remzap Sp. z o.o. Jul 14 2025 promissory Azotowe thousand 2018 undertaking guarantee note Puławy S.A. blank promissory Calderys note and unrelated contractual Remzap Sp. z o.o. Polska Sp. PLN 68.4 thousand Jan 17 2018 Jul 12 2019 power of undertaking guarantee z o.o. attorney to bank account blank promissory PKN Orlen note and State-owned contractual Remzap Sp. z o.o. PLN 359.6 thousand Dec 8 2015 Nov 14 2019 S.A. power of company guarantee attorney to bank account

9 Includes sureties and guarantees received in H1 2019 and expired before June 30th 2019, as well as sureties and guarantees effective as at June 30th 2019 (excluding sureties issued before January 1st 2019 and effective in 2019). 60 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Guarantees and sureties provided by PROZAP Sp. z o.o. and effective as at June 30th 2019 Relations Total hip Beneficiary surety/guarantee Financial Purpose Secured obligor Issue date Expiry date between amount as at the terms the reporting date parties payment performance Grupa Azoty of the Grupa bond Zakłady PLN 375.0 entire Azoty PROZAP Sp. z o.o. Apr 10 2017 Oct 20 2020 guarantee Azotowe thousand amount to Group provided by Police S.A. account at company bank PKO BP transfer of 20% of bond performance Air Liquide value bond Global E&C PLN 79.9 third PROZAP Sp. z o.o. Jul 20 2018 Jan 31 2021 under guarantee Solutions thousand party framewor provided by a Poland S.A. k bank agreemen t performance bond Vitkovice Power PROZAP Sp. z PLN 187.7 third May 22 2015 Apr 25 2020 guarantee Engineering a.s. o.o. thousand party provided by bank performance bond PROZAP Sp. z PLN 579.0 third Vitkovice ENVI Sep 18 2018 Jan 22 2021 guarantee o.o. thousand party provided by bank

Sureties and guarantees issued at the request of companies of the Grupa Azoty Zakłady Azotowe Puławy Group and effective as at June 30th 2019 PROZAP Sp. z o.o.

Relation s Total hip Beneficiary surety/guarantee Financial Purpose Secured obligor Issue date Expiry date between amount as at the terms the reporting date parties payment performance Grupa Azoty of the Grupa bond Zakłady PLN 375.0 entire Azoty PROZAP Sp. z o.o. Apr 10 2017 Oct 20 2020 guarantee Azotowe thousand amount to Group provided by Police S.A. account at company bank PKO BP transfer of 20% of bond performance Air Liquide value bond Global E&C PLN 79.9 third PROZAP Sp. z o.o. Jul 20 2018 Jan 31 2021 under guarantee Solutions thousand party framewor provided by a Poland S.A. k bank agreemen t

61 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

REMZAP Sp. z o.o.

Relations Total hip Beneficiary surety/guarantee Financial Purpose Secured obligor Issue date Expiry date between amount as at the terms the reporting date parties

blank unrelated KB Pomorze PLN 245.0 contractual Remzap Sp. z o.o. May 22 2019 Apr 30 2021 promissor undertaki Sp. z o.o. thousand guarantee y note ng

5.4. Letters of credit Grupa Azoty Zakłady Azotowe Puławy S.A. 1. In January 1st–June 30th 2019, no new import letters of credit were issued. 2. On March 13th 2019, EUR 1,056,330 was paid under the EUR 1,056,330 letter of credit issued by PKO BP S.A. at the request of Grupa Azoty Zakłady Azotowe Puławy S.A. in favour of a supplier of drum equipment for the mechanical granulation unit. As at June 30th 2019, the credit balance under the letter of credit was EUR 0. The letter of credit was issued under the multi-purpose credit facility agreement with PKO BP S.A. 3. In April 2019, the validity of a EUR 2,040,000 import letter of credit issued by PKO BP S.A. at the request of Grupa Azoty Zakłady Azotowe Puławy S.A. was extended by three months (i.e. until July 5th 2019). The beneficiary was a supplier of a CO 2 condensation and purification system. As at June 30th 2019, the credit balance under the letter of credit was EUR 170,000. The letter of credit was issued under the multi-purpose credit facility agreement with PKO BP S.A. 4. On April 9th 2019, EUR 94,300 was paid under the EUR 1,414,500 letter of credit issued by PKO BP S.A. at the request of Grupa Azoty Zakłady Azotowe Puławy S.A. in favour of a supplier of neutralisation equipment for the nitric acid unit. As at June 30th 2019, the credit balance under the letter of credit was EUR 0. The letter of credit was issued under the multi-purpose credit facility agreement with PKO BP S.A.

5.5. Insurance policies Grupa Azoty Zakłady Azotowe Puławy S.A. In January 2019: an insurance contract was signed with Towarzystwo Ubezpieczeń Euler Hermes S.A. (TUEH) to cover trade credit risk for the period from February 1st 2019 to January 31st 2020. • The insurance policy covered: – domestic sales and exports of caprolactam and melamine, sales of other products to customers buying caprolactam, melamine, as well as sales of PUC-C and alcohol foreshots; – fertilizer exports; sales of LIKAM and PULNOx to CHP plants, power plants, cement plants, waste incineration plants, and wastewater treatment plants; NOXy sales; domestic sales of technical grade urea; sales of ammonia, hydrogen peroxide, carbon dioxide, hydrogen, nitric acid, and Coolant/dry ice, PULAN Makro. Receivables are insured up to the credit limits set by the insurer (except transactions covered by bank guarantees and letters of credit). The expected total value of transactions covered by the insurance is PLN 1,443m.

62 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

• Annex 3 was signed to the Construction and assembly all-risk insurance agreement in connection with the ‘Production unit for ammonium nitrate-based granulated fertilizers’ project. Under the Annex, the insurance period for the first stage of the project was extended from January 31st 2019 to July 31st 2019, with the premium amount increased. In February 2019: Grupa Azoty S.A., acting on its own behalf as well as for other Grupa Azoty Group companies (including Grupa Azoty Zakłady Azotowe Puławy S.A.) executed a Master Agreement with Towarzystwo Ubezpieczeń Wzajemnych Polski Zakład Ubezpieczeń Wzajemnych (TUW PZUW) under a consolidated property insurance programme, for the period March 1st 2019–February 28th 2022. • Under the Master Agreement, TUW PZUW issued to Grupa Azoty Zakłady Azotowe Puławy S.A the following policies for the period March 1st 2019–February 29th 2020: – all-risk property insurance (AR/PD) – total sum insured: PLN 10.8bn; – business interruption insurance (BI) – total sum insured: PLN 1.7bn, – machinery breakdown insurance (MB) – total sum insured: PLN 585m, – all-risk electronic equipment insurance (EEI) – total sum insured: PLN 3m. In March 2019: • the insurance period under the Construction and Assembly All-Risk Insurance Master Agreement was extended from December 31st 2018 to July 31st 2019, in connection with the execution of the ‘Construction of a vacuum concentration unit for ammonium nitrate solution process line 3 of the ammonium nitrate unit’ project. In May 2019: • an insurance contract was signed with Towarzystwo Ubezpieczeń Euler Hermes S.A. (TUEH) to cover trade credit risk for the period from July 1st 2019 to June 30th 2020. Under the contract, domestic sales of fertilizers are insured up to the credit limits set by the insurer (except transactions covered by bank guarantees and letters of credit). The insurance covers receivables arising from June 1st 2019; • under Annex 2 to the Certificate issued under the Construction and Assembly All-Risk Insurance Master Agreement with TUW PZUW, the insurance period for the ‘Upgrade of unit for CO 2 absorption in potassium carbonate solutions – Line IV of the Gas Pre-Treatment System’ project was extended without an additional premium from December 31st 2018 to June 30th 2019; • TUW PZUW issued a personal accident insurance policy for the period from May 15th 2019 to October 15th 2019, covering participants of the Grupa Azoty Zakłady Azotowe Puławy Employee Volunteering Programme; • Grupa Azoty S.A. sent to Grupa Azoty Group companies, including Grupa Azoty Zakłady Azotowe Puławy S.A., the following documents: 1. a scanned copy of Resolution No. 208/XI/2019 of the Management Board of Grupa Azoty S.A. of May 15th 2019, under which the Management Board of Grupa Azoty S.A.: − agreed to the filing of a claim against FST Management Sp. z o.o.; − issued a favourable recommendation for Grupa Azoty Group companies, including Grupa Azoty Zakłady Azotowe Puławy S.A., regarding court enforcement of claims for payment of all outstanding funds under the Insurance Fund, such claims resulting from

63 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

a Broker Order Agreement of May 31st 2013 and an Agreement for the transfer of funds to the Insurance Fund of February 20th 2014; 2. a draft statement of claim against FST Management Sp. z o.o. prepared by legal counsels of Grupa Azoty S.A. on behalf of that company. The draft statement is not binding on Grupa Azoty Zakłady Azotowe Puławy S.A. The case is being handled by legal counsels of Grupa Azoty Zakłady Azotowe Puławy S.A. In June 2019: • under the Construction and Assembly All-Risk Insurance Master Agreement, a Certificate was issued by Towarzystwo Ubezpieczeń Wzajemnych Polski Zakład Ubezpieczeń Wzajemnych (TUW PZUW) relating to Project 1099 – ‘Upgrade of KS-3, KS-4, KS-5 and KS-6 compressors, increasing the efficiency of synthesis compressors No. 3, 4, 5 and 6 ’; the sum insured is PLN 5m; • Annex 2 was issued to the Certificate issued under the Construction and Assembly All-Risk Insurance Master Agreement by Towarzystwo Ubezpieczeń Wzajemnych Polski Zakład Ubezpieczeń Wzajemnych (TUW PZUW), covering Project 1084 – ‘Upgrade of unit for CO 2 absorption in potassium carbonate solutions – Line IV of the Gas Pre-Treatment System’. Under the Annex, the project insurance period was extended from June 30th 2019 to December 31st 2019, against payment of an additional premium; • Towarzystwo Ubezpieczeń Wzajemnych Polski Zakład Ubezpieczeń Wzajemnych (TUW PZUW) is expected to issue the following master agreements: a) TPL Insurance Master Agreement for the period from July 1st 2019 to June 30th 2021, b) CARGO Insurance Master Agreement for the period from July 1st 2019 to June 30th 2022, c) Construction and Assembly All-Risk Insurance Master Agreement for the period from July 1st 2019 to June 30th 2022.

Under the Master Agreements referred to in a) and b) above, TUW PZUW will issue policies, including insurance policies covering Grupa Azoty Zakłady Azotowe Puławy S.A. for the period from July 1st 2019 to June 30th 2020. Under the agreement referred to in c) above, insurance certificates for individual projects will be issued throughout the agreement term at the request of individual Grupa Azoty Group companies (including Grupa Azoty Zakłady Azotowe Puławy S.A.) covered by the agreement, where such projects are submitted for insurance; • the all-risk property damage insurance (AR/PD) and electronic equipment insurance (EEI) covering the assets used by D.W. JAWOR issued by TUW PZUW were renewed for another period, i.e. from July 1st 2019 to June 30th 2020; • STU ERGO Hestia S.A. issued a personal accident insurance policy for the period from July 1st 2019 to June 30th 2020 (under the Accident Insurance Master Agreement concluded for the period from September 1st 2018 to June 30th 2020). The insurance covers selected employees of Grupa Azoty Zakłady Azotowe Puławy S.A., i.e. persons entitled to bonus pay for service on chemical emergency response teams, employees of the Company Fire Brigade, persons participating in escorts and cashiers/assistant cashiers; • Colonnade Insurance S.A. Poland Branch - Polisa issued a group international travel insurance policy for the period from July 1st 2019 to June 30th 2020. The insureds include employees of Grupa Azoty Zakłady Azotowe Puławy S.A.

64 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Grupa Azoty Zakłady Azotowe Puławy Group companies GZNF Fosfory Sp. z o.o. In the first half of 2019, GZNF Fosfory Sp. z o.o. entered into the following insurance contracts: 1. Master Agreement with Towarzystwo Ubezpieczeń Wzajemnych Polski Zakład Ubezpieczeń Wzajemnych under a consolidated property insurance programme, for the period March 1st 2019–February 28th 2022. The sum insured is PLN 331.8m and comprises: • All-risk property insurance, effective from March 1st 2019 to February 29th 2020; the sum insured is PLN 281.9m; • Loss of profit insurance, effective from March 1st 2019 to February 29th 2020; the sum insured is PLN 48.6m; • Electronic equipment insurance, effective from March 1st 2019 to February 29th 2020; the sum insured is PLN 1.3m. 2. Motor Insurance master agreement with TUW PZUW, covering 40 vehicles of the company. The insurance agreement was signed for the period from January 1st 2019 to December 31st 2019. The limit of liability under the insurance applies only to vehicles covered by all-loss insurance and the sum insured is PLN 748.0 thousand. 3. All-loss rail vehicle insurance agreement. The insurance covers rolling stock (railroad cars). The insurance agreement was signed for the period from March 1st 2019 to February 29th 2020. The sum insured is PLN 5.6m. Zakłady Azotowe Chorzów S.A. In the first half of 2019, Zakłady Azotowe Chorzów S.A. executed a Motor Insurance Master Agreement with STU ERGO HESTIA S.A., covering vehicles owned by the company. 1. The insurance agreement was signed for the period from January 1st 2019 to December 31st 2019. The sum insured under the all-loss (AC), accident (NNW), theft (KR) and assistance (ASS) insurance is PLN 835.8 thousand; 2. The insurance covers employees on business trips in the period from May 20th 2019 to June 8th 2019. The sum insured was PLN 200.00 thousand. AGROCHEM PUŁAWY Sp. z o.o. In H1 2019, AGROCHEM PUŁAWY Sp. z o.o. concluded: 1. a (professional) road carrier liability insurance contract with GENERALI TU S.A., covering the period from February 19th 2019 to February 18th 2020. The sum insured for a single and all events during the term of the contract is EUR 64,000; 2. a motor insurance contract with STU ERGO HESTIA S.A., covering the period from January 1st 2019 to December 31st 2019. The sum insured is PLN 5,017.92 thousand. PROZAP Sp. z o.o. In the first half of 2019, PROZAP Sp. z o.o. entered into the following insurance contracts: 1. Electronic equipment insurance contract for the period from January 26th 2019 to June 30th 2019. The sum insured is PLN 1,128.4 thousand; 2. All-risk property insurance contract for the period from January 26th 2019 to June 30th 2019. The sum insured is PLN 1,793.0 thousand;

65 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

3. Motor third-party liability and all-loss insurance contract for six company cars for the period from January 1st 2019 to December 31st 2019. The sum insured is PLN 240.4 thousand; 4. Group foreign trip insurance contract for the period from January 25th 2019 to January 24th 2020. The sum insured is PLN 2,116.0 thousand. SCF Natural Sp. z o.o. In the first half of 2019, SCF Natural Sp. z o.o. entered into the following insurance contracts: 1. Motor insurance contract for the period from February 24th 2019 to February 23rd 2020. The sum insured is PLN 72.83 thousand + statutory liability insurance (OC); 2. Motor insurance contract for the period from March 31st 2019 to March 30th 2020. The sum insured is PLN 57.22 thousand + liability insurance (OC) in accordance with the statutory requirements.

5.6. Currency and interest rate risk management Currency risk management at Grupa Azoty Zakłady Azotowe Puławy S.A. is based on the policy and defined objectives, and implemented by the Currency Risk Committee. It comprises identification and monitoring of the risk exposures, as well as hedging and measurement of effectiveness of the hedges. Grupa Azoty Zakłady Azotowe Puławy S.A. Currency risk Grupa Azoty Zakłady Azotowe Puławy S.A. manages its foreign exchange risk using natural hedging as well as derivative financial instruments, such as forward contracts. Basically, the Company takes steps to protect itself against a strong appreciation of the złoty against foreign currencies, Currency risk hedging transactions In January 1st–June 30th 2019, Grupa Azoty Zakłady Azotowe Puławy S.A. closed a total of 37 hedging transactions with a net aggregate gain of PLN (+) 183,571.23. The bank measured 35 transactions which were open as at June 30th 2019 at PLN (+) 1,314,582.06. The effect of hedging transactions on the net profit for January 1st−June 30th 2019 was posive at PLN (+) 1,174,080.35, including: • PLN (+) 183,571.23 on closed transactions; • PLN (+) 1,314,582.06 from measurement of open positions as at June 30th 2019; • PLN (-) 324,072.94 from derecognition of transactions open as at December 31st 2018.

Interest rate risk Grupa Azoty Zakłady Azotowe Puławy S.A. has in place an interest rate risk management procedure under which the Company monitors its interest rate risk exposure. In H1 2019, there were no circumstances which would require execution of interest rate hedging transactions.

66 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

6. Business environment, factors and events affecting operations, results and growth prospects 6.1. Macroeconomic overview and outlook Global economy The table below shows the global economic growth forecasts presented in the World Bank’s ‘Global Economic Prospects - June 2019 – Subdued Investment’ report:

GDP growth rate 2019 2020 2021 1. Global economy 2.6% 2.7% 2.8% 2. developed economies 1.7% 1.5% 1.5% 3. emerging and developing economies 4.0% 4.6% 4.6% 4. US 2.5% 1.7% 1.6% 5. Japan 0.8% 0.7% 0.6% 6. China 6.2% 6.1% 6.0%

Poland The Monetary Policy Council expects a favourable economic climate in Poland. Poland’s GDP growth rate will be relatively high in the coming years. At the same time inflation will remain moderate, around the target set by the Monetary Policy Council. At a press conference held on July 3rd 2019 after the Monetary Policy Council’s meeting, the Governor of the National Bank of Poland presented key information on the inflation and GDP forecasts for Poland: • Inflation will (with a 50% probability) range from 1.7% to 2.3% in 2019, from 1.9% to 3.7% in 2020, and from 1.3% to 3.5% in 2021 (the July inflation forecasts are higher than those published in March 2019); • GDP growth rate will (with a 50% probability) range from 3.9% to 5.1% in 2019, from 3.0% to 4.8% in 2020, and from 2.4% to 4.3% in 2021 (the July GDP growth rate forecasts are higher than those published in March 2019). Bank Credit Agricole, taking into account recent data on the real economy and trends revealed by business sentiment surveys, revised its macroeconomic forecasts, raising its inflation and GDP growth projections for Poland in 2019: • The revised inflation forecast for 2019−2020 is, respecvely, 2.2% in 2019 and 2.0% in 2020; • The revised GDP growth forecast for 2019 is 4.7% (April 2019: 4.3%); the GDP growth forecast for 2020 remained unchanged, at 3.8%. Analysts from Credit Agricole expect the second quarter of 2019 to see the peak of the current economic growth cycle. In their opinion, Poland’s GDP growth should remain relatively high in the coming quarters of 2019, with a slight trend to decline. The main reason for the upward revision of the GDP growth forecast for 2019 by Credit Agricole is the forecast’s higher ‘starting point’, i.e. the markedly higher-than-expected GDP growth rate in Q1 2019.

According to a report published in June 2019 by the International Monetary Fund:

67 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

• Poland’s economy will grow faster than those of most countries around the world, including developed and eurozone countries; • Poland’s GDP is expected to grow by 4.0% in 2019, 3.6% in 2020 and 3.3% in 2021; According to the World Bank’s report, Poland’s GDP growth will be supported by the recently announced package of social transfers and tax reductions, the estimated cost of which is around 2% of the country’s GDP. However, the pace of economic growth will decelerate with time due to a reduction in production capacities and slowdown in investment.

6.2. Exchange rates Average monthly exchange rate according to the NBP data Jan 1 – Jan 1 – Currency Change Jun 30 2019 Jun 30 2018 1 2 3 4=(2-3)/3 PLN/USD 3.8007 3.4887 8.94% PLN/EUR 4.2934 4.2213 1.71%

Foreign exchange projections According to Oxford Economics’ forecasts, in the coming quarters of 2019 the Polish currency: − will appreciate against the euro, with the exchange rate at PLN 4.2693 = EUR 1 in Q3 2019, PLN 4.2562 = EUR 1 in Q4 2019, − will depreciate against the US dollar, with the exchange rate at PLN 3.8119 = USD 1 in Q3 2019, and will subsequently strengthen, to PLN 3.8002 = USD 1 in Q4 2019, and PLN 3.7787 = USD 1 in Q1 2020.

6.3. Interest rates Poland In H1 2019, interest rates in Poland remained unchanged. During the Monetary Policy Council’s latest meeting, held on July 2nd–July 3rd 2019, Adam Glapiński, its Chairman and Governor of the National Bank of Poland, said that current interest rates help the Polish economy continue on the path of sustainable growth and support the macroeconomic balance. In his opinion, interest rates will remain unchanged until the end of 2021. Interest rates in Poland in the first half of 2019

Reference rate Lombard rate Deposit rate Rediscount rate 1.50% 2.50% 0.50% 1.75% Source: NBP European Union At its meeting held in June 2019, the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40%, respectively. Although the Governing Council of the ECB has assured that the interest rates will remain unchanged at least until the end of 2019, in late June 2019 the ECB was reportedly considering a change of its position and lowering the interest rates as early as in September 2019.

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United States In H1 2019, interest rates in the US remained unchanged. The main interest rate continued to range between 2.25% and 2.50%. The Federal Open Market Committee (FOMC) 10 : • determined that the US labour market is still strong, with economic activity growing at a moderate pace; • believes that sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes of the current economic cycle, but uncertainties about this outlook have increased. In view of these uncertainties as well as muted inflation pressures, the Committee announced that it would continue to monitor the implications of incoming data for the economic outlook.

6.4. Economic climate in the chemical industry Chemical industry In the first half of 2019: • the chemical industry assessed the economic climate as positive; • the average PMI 11 index for the manufacturing sector in Poland amounted to 48.5 and was lower than that recorded in H2 2018; • for the eurozone, the average PMI was 48.4; • the general business climate indicator of Statistics Poland (GUS) 12 for the ‘manufacture of chemicals and chemical products’ category in Poland was +19.5, a slight increase on the previous six months (average +17.7); • stock exchange data shows improved performance of the chemical sector – on June 28th 2019, the WIG-CHEMIA index rose 13.84% relative to January 2nd 2019. The WIG-CHEMIA index declined 22.27% in the same period of the previous period, and 21.37% in the second half of 2018; • threats to the global chemical market include continuing protectionist trends and the looming trade war; For instance, China has applied anti-dumping duties on styrene imported from the US, South Korea and Taiwan. Given the current political situation, other tariffs may still be imposed in international trade. Agriculture Compared with H1 2019, economic conditions in agriculture improved. The synthetic economic index for agricultural production (SWKR) 13 stood at 100.2pp, having increased by 0.7pp.

10The Federal Open Market Committee (FOMC) is responsible for, inter alia, determining the direction of the US monetary policy and for setting the target levels of money supply. 11 PMI (purchasing managers index) for manufacturing sector – an indicator of economic activity in individual countries, published by the Markit agency. It is based on surveys among managers. Questions concern new orders, production volumes, employment numbers, supply and stock volumes. The threshold value separating an increase from a decrease in activity is set at 50 points 12 The general business climate indicator of Statistics Poland (GUS) shows the sentiment prevailing among entrepreneurs operating in a given industry. The methodology for business climate surveying by Statistics Poland (with the use of a business climate test) consists in collecting entrepreneurs’ opinions on the current and future situation of their enterprises in the following areas: order book, production, financial condition, employment, prices, capex, and barriers. The highest and lowest values of the indicator are +100 and -100. The threshold value is set at 0. A positive value of the indicator means a positive climate and a negative one means a negative one. 13 Synthetic economic index for agricultural production – a synthetic quantitative indicator illustrating changes in the market conditions for agricultural production. It is calculated as the arithmetic mean of the price differential index and the potential demand index. 69 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Experts believe that economic conditions in agriculture should remain stable (or slightly deteriorate) in the near future. The agricultural sector may be stimulated by a continued seasonal rise in pork livestock purchase prices, but may also be dragged down by (possible) further rises in the retail prices of agricultural means of production, including the prices of mineral fertilizers and crop protection products. Grain market in Poland In the first half of 2019, grain prices on the Polish and global markets alike increased significantly year on year. According to the Polish Institute of Agricultural and Food Economics and the Integrated Agricultural Information System of the Polish Ministry of Agriculture and Rural Development, year on year in the first half of 2019 domestic farm gate prices of • wheat and rye increased on average by, respectively, about 21% and over 24%. • In the second half of 2019, farm gate prices of grains will depend on crop volumes and quality, which in turn will be affected by the weather during the ripening and harvesting time.

Farm gate prices of wheat in Poland [PLN/t] 900,0

850,0

800,0

750,0

700,0

650,0

600,0

550,0 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Polish Institute of Agricultural and Food Economics; estimates for June 2019 based on market data.

70 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Farm gate prices of rye in Poland [PLN/t] 750,0

700,0

650,0

600,0

550,0

500,0

450,0 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Polish Institute of Agricultural and Food Economics; estimates for June 2019 based on market data.

International grain market Year on year, in the first half of 2019 the average prices of wheat • in the European Union and the US rose, respectively, by about 15% and 4.5%. • According to June forecasts of the US Department of Agriculture (USDA), in the 2019/2020 season: • global wheat consumption will increase by 3.6 million tonnes; • the closing stocks will rise by 1.3 million tonnes to reach a record-high level of 294.3 million tonnes; • after the 2019 harvest, wheat prices on foreign markets are expected to decline. All this may change depending on the weather during grain ripening and harvesting. Nitrogen fertilizers Polish market In the period January−April 2019, demand for nitrogen ferlizers was on a strong upward trend, driven by retailers’ and distributors’ re-stocking ahead of the spring fertilizer season, as well as improved financial condition of farmers, who received direct payments for 2018. In May and June 2019, demand weakened as the fertilizer application season was drawing to an end. Year on year, in H1 2019 the average retail prices of nitrogen fertilizers in Poland were considerably higher, including: • urea – by over 10%; • ammonium nitrate – by more than 7.5%; • UAN – by about 20%; • ammonium sulfate – by ca. 12%; • calcium ammonium nitrate – by over 10%.

71 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

The improved situation on global markets was the key contributor to higher prices of nitrogen fertilizers. In autumn 2019, if grain prices and farm gate prices of agricultural produce are favourable, prices of nitrogen fertilizers may go further up.

Retail prices of urea on the Polish market [PLN/tonne] 1 650,0

1 600,0

1 550,0

1 500,0

1 450,0

1 400,0

1 350,0 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Polish Institute of Agricultural and Food Economics; estimates for June 2019 based on market data. Retail prices of ammonium nitrate on the Polish market [PLN/tonne] 1 400,0

1 350,0

1 300,0

1 250,0

1 200,0

1 150,0 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Polish Institute of Agricultural and Food Economics; estimates for June 2019 based on market data.

72 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Retail prices of UAN on the Polish market [PLN/tonne] 1 200,0 1 150,0 1 100,0 1 050,0 1 000,0 950,0 900,0 850,0 800,0 750,0 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Data from points of sale and in-house calculations.

Retail prices of ammonium sulfate on the Polish market [PLN/tonne] 950,0

900,0

850,0

800,0

750,0

700,0

650,0 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Data from points of sale and in-house calculations.

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Retail prices of calcium ammonium nitrate on the Polish market [PLN/tonne] 1 250,0

1 200,0

1 150,0

1 100,0

1 050,0

1 000,0 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Polish Institute of Agricultural and Food Economics; estimates for June 2019 based on market data.

International markets In the first half of 2019, the average prices of all nitrogen fertilizers on international markets were as follows (based on Fertecon, Infofert and World Fertilizer Market data): • - prilled bulk urea (FOB Baltic) – USD 243/tonne, up by 8% year on year and down almost 12% relative to H2 2018; in the coming months, the prices of urea should remain unchanged; • - prilled ammonium nitrate (FOB Baltic/Black Sea bulk) – USD 182/tonne, up by ca. 3% year on year and down by over 8% relative to H2 2018; in the coming months, the prices of ammonium nitrate are expected to continue at the same level (or possibly go up); • UAN 32% N (FOB Baltic Sea) – USD 169/tonne, up by over 5.6% year on year and down by ca. 18% relative to H2 2018; UAN prices will probably continue to rise in the coming months; • ammonium sulfate (FOB Black Sea steel grade) – USD 109/tonne, up by 3.8% year on year and down by 0.7% relative to H2 2018; in the coming months, the prices of ammonium sulfate will probably stay close to the current level; • CAN (cfr dom Germany) – EUR 195/tonne, up by nearly 9% year on year, and down by 4% relative to H2 2018; CAN prices are expected to trend upwards in the coming months.

74 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Price of prilled bulk urea FOB Baltic 310

290

270

250

230

USD/tonne 210

190

170

150 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Fertecon, WFM

Price of prilled ammonium nitrate FOB Baltic/Black Sea 250

230

210

190 USD/tonne 170

150

130 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Fertecon, WFM

75 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Price of UAN FOB Baltic Sea 32%N 245

225

205

185

165 USD/tonne 145

125

105 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Fertecon, WFM

Price of ammonium sulfate FOB Black Sea steel grade 130

120

110

100

USD/tonne 90

70 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Fertecon, WFM

76 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Price of CAN (CFR dom Germany) 245

225

205

185

165 EUR/tonne 145

125

105 I II III IV V VI VII VIII IX X XI XII

2017 2018 2019

Source: Fertecon, Infofert. In the first half of 2019, due to low sales margins, disrupted supplies of natural gas, technical issues and global political unrest, the following developments were also observed on global fertilizer markets: • suspension of production of: − ammonia – in Indonesia, Algeria, Slovakia, Romania, India and Ukraine; − - urea – in Indonesia, Egypt, Belarus, Hungary, Austria, India, Saudi Arabia, Qatar, UAE, Ukraine, Russia and Algeria; • resumption of production of: − ammonia – in India, Ukraine and Egypt; − urea – in India, Ukraine, Egypt.

Regulations in international trade in fertilizers On April 11th 2019, the Commission Implementing Regulation (EU) 2019/576 of April 10th 2019 imposing a provisional anti-dumping duty on imports of mixtures of urea and ammonium nitrate originating in Russia, Trinidad and Tobago and the United States of America was published in the Official Journal of the European Union. The Regulation entered into force on the day following that of its publication in the Official Journal of the European Union, i.e. April 12th 2019, and will remain effective for six months. The definitive duty is to be announced on October 11th 2019. The Grupa Azoty Group, through its active participation in Fertilizers Europe (an organisation of European fertilizer manufacturers), is taking steps to maintain in force and/or have imposed new protective measures on imports of products offered by the Group.

Phosphate fertilizers In H1 2019, the average price of DAP on international markets went down by USD 23/tonne or 5.84% year on year, to USD 371/tonne (USD 348/tonne at the period’s end). 14 The decline in market prices of

14 DAP – di-ammonium phosphate. 77 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

DAP is attributable chiefly to weaker demand for phosphate fertilizers in China and their higher supply on the African market.

DAP Baltic prices 500 480 460 440 420 400 380 USD/tonne 360 340 320 300 I II III IV V VI VII VIII IX X XI XII

2016 2017 2018 2019

Source: In-house data.

Compound fertilizers Towards the end of Q2 2019, the prices of NPK fertilizers fell on international markets. On the German market, in the first half of 2019 the average price of NPK 15/15/15 rose by PLN 88/tonne (8.16%) year on year, to PLN 1,166/tonne. In the coming moths of 2019, conditions on the international market of NPK fertilizers are expected to be favourable, due to weaker price and supply pressures from Eastern producers. In Poland, in H2 2019, stable conditions for compound fertilizers are expected on declining imports from the East, combined with increased interest in Polish fertilizer products (both high- and low- concentration NPK fertilizers) from Ukrainian customers.

Melamine Developments on global markets of melamine in the first half of 2019: − in China: a drop in melamine supply as a result of maintenance shutdowns, low demand and depressed margins; − in Europe: new import offers from Qatar, Russia and China; − in the US: higher demand for melamine driven by strong activity in the construction industry; − in South-East Asia: a significant decline in the melamine market since May 2019, due to the rainy season; − the impact of the US-China trade war on the chemical industry, particularly in China, has been aggravating. A decline in car sales in the US results in lower demand for semi-finished products; − launch of a new melamine unit (with an annual capacity of 40,000 tonnes) by an Indian manufacturer. India’s melamine production capacity before its launch was 15,000 78 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

tonnes/year; − resumption of production by a Japanese melamine manufacturer (with an annual capacity of 40,000 tonnes), after it had been shut down at the end of 2018 due to mechanical issues; − overhaul of a Dutch melamine producer’s unit in Geleen; − overhaul of a melamine unit by an Austrian manufacturer since mid-June 2019. In Europe, in the first half of 2019, the average European melamine prices (according to ICIS 15 ) were as follows: − contract prices fell by 5.5% (or EUR 90/tonne) both year on year and relative to H2 2018; − SPOT prices fell by 14.5% (or EUR 201/tonne) year on year and 12.3% (EUR 167/tonne) relative to H2 2018.

EUR/t Melamine contract prices [FD NWE EUR/t] 1 750

1 650

1 550

1 450

1 350

1 250

1 150 I2016 I2017 I2018 I2019 II II 2016 II 2017 II 2018 II 2019 X X 2016 X 2017 X 2018 V2016 V2017 V2018 V2019 III2016 III2017 III2018 III2019 IX2016 XI2016 IX2017 XI2017 IX2018 XI2018 IV2016 VI2016 IV2017 VI2017 IV2018 VI2018 IV2019 VI2019 XII2016 XII2017 XII2018 VII2016 VII2017 VII2018 VIII2016 VIII2017 VIII2018 Source: ICIS Pricing.

The following developments are expected in the coming months: • continued low demand for melamine in Europe due to lower customer activity during the holiday season; • higher prices of melamine in the US, due to expected peak consumption by the construction industry; • in China, the melamine market will depend on the buyers’ sentiment and the level of margins earned by local producers.

Regulations in international trade in melamine Following an investigation, the European Commission adopted Implementing Regulation (EU) No 2017/1171 imposing a definitive anti-dumping duty on imports of melamine originating in China. The

15 ICIS – Independent Chemical Information Service. 79 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

measures took the form of a fixed duty of EUR 415 per tonne on all imports from China with the exception of three cooperating Chinese exporting producers, which were granted a minimum import price of EUR 1,153 per tonne. The measures were imposed for a period of five years, i.e. until July 2nd 2022. The entry into force, on February 1st 2019, of the free trade agreement between Japan and the European Union may results in an increased interest of the European customers in Japanese melamine. Caprolactam In H1 2019, caprolactam prices followed a downward trend, mainly due to: • oversupply; • low purchasing activity; • reduced consumption by key industries (automotive, textiles, construction); • benzene price increases; • spring holiday breaks and technical issues affecting some manufacturing plants across the world. Caprolactam prices in the first half of 2019: A. year on year: • in Asia – the prices of imported caprolactam in China fell by ca. 20.1% (or USD 425/tonne), and in Taiwan – by 20.9% (or USD 440/tonne); • in Europe: o prices of liquid caprolactam in EUR-denominated transactions (average for domestic large and medium customers according to the Wood Mackenzie Chemicals classification) decreased by approximately 6.3% (EUR 149/tonne), and in USD- denominated transactions fell by approximately 13.5% (USD 335/tonne); o export contract prices of flaked caprolactam (average for Flake Export according to Wood Mackenzie Chemical classification) – fell in EUR-denominated transactions by 16.7% (EUR 271/tonne), and in USD-denominated transactions – by 22.3% (USD 438/tonne); • in the US – export contract prices of flaked caprolactam fell by 22.6% (or USD 233/tonne);

B. compared with the second half of 2018: • in Asia – the prices of imported caprolactam in China fell by 20.7% (or USD 422/tonne), and in Taiwan – by 20.9% (or USD 438/tonne); • in Europe: o prices of liquid caprolactam in EUR-denominated transactions (average for domestic large and medium customers according to the Wood Mackenzie Chemicals classification) decreased by approximately 6.9% (EUR 142/tonne), and in USD- denominated transactions fell by approximately 8.8% (USD 206/tonne); o export contract prices of flaked caprolactam (average for Flake Export according to Wood Mackenzie Chemical classification) – fell in EUR-denominated transactions by 20.9% (EUR 358/tonne), and in USD-denominated transactions – by 22.5% (USD 445/tonne); • in the US – export contract prices of flaked caprolactam fell by 22.9% (or USD 444/tonne).

80 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Prices of caprolactam in Asia 2 600 2 450 2 300 2 150 2 000 1 850 1 700 1 550 1 400 1 250 1 100 I 2019 I I 2018 I I 2017 I I 2016 I I 2015 I I 2014 I II 2019 II II 2018 II II 2017 II II 2016 II II 2015 II II 2014 II X 2018 X X 2017 X X 2016 X X 2015 X X 2014 X V 2019 V V 2018 V V 2017 V V 2016 V V 2015 V V 2014 V III 2019 III III 2018 III IX 2018 XI 2018 III 2017 III IX 2017 XI 2017 III 2016 III IX 2016 XI 2016 III 2015 III IX 2015 XI 2015 III 2014 III IX 2014 XI 2014 IV IV 2019 VI 2019 IV IV 2018 VI 2018 IV IV 2017 VI 2017 IV IV 2016 VI 2016 IV IV 2015 VI 2015 IV IV 2014 VI 2014 XII 2018 XII XII 2017 XII XII 2016 XII XII 2015 XII XII 2014 XII VII 2018 VII VII 2017 VII VII 2016 VII VII 2015 VII VII 2014 VII VIII 2018 VIII VIII 2017 VIII VIII 2016 VIII VIII 2015 VIII VIII 2014 VIII

Caprolactam Asia Import Taiwan Contract CFR USD/t Caprolactam Import China Spot CFR USD/t Caprolactam Import China Contract CFR USD/t

Source: Wood Mackenzie Chemicals

Prices of caprolactam in Europe 2 300

2 000

1 700

1 400

1 100

800 I 2014 I 2015 I 2016 I 2017 I 2018 I 2019 I II 2014 II 2015 II 2016 II 2017 II 2018 II 2019 II X 2014 X 2015 X 2016 X 2017 X 2018 X V 2014 V 2015 V 2016 V 2017 V 2018 V 2019 V III 2014 III 2015 III 2016 III 2017 III 2018 III 2019 III IX IX 2014 XI 2014 IX 2015 XI 2015 IX 2016 XI 2016 IX 2017 XI 2017 IX 2018 XI 2018 IV IV 2014 VI 2014 IV 2015 VI 2015 IV 2016 VI 2016 IV 2017 VI 2017 IV 2018 VI 2018 IV 2019 VI 2019 XII 2014 XII 2015 XII 2016 XII 2017 XII 2018 XII VII 2014 VII 2015 VII 2016 VII 2017 VII 2018 VII VIII 2014 VIII 2015 VIII 2016 VIII 2017 VIII 2018 VIII

Caprolactam Europe Domestic Large Contract DEL EUR/t Caprolactam Europe Domestic Medium Contract DEL EUR/t Caprolactam Europe Flake Export FOB EUR/t

Source: Wood Mackenzie Chemicals

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Prices of caprolactam in the US

2 350

2 050

1 750

1 450

1 150

850 I 2019 I I 2018 I I 2017 I I 2016 I I 2015 I I 2014 I II 2019 II II 2018 II II 2017 II II 2016 II II 2015 II II 2014 II X 2018 X X 2017 X X 2016 X X 2015 X X 2014 X V 2019 V V 2018 V V 2017 V V 2016 V V 2015 V V 2014 V III 2019 III III 2018 III IX 2018 XI 2018 III 2017 III IX 2017 XI 2017 III 2016 III IX 2016 XI 2016 III 2015 III IX 2015 XI 2015 III 2014 III IX 2014 XI 2014 IV IV 2019 VI 2019 IV IV 2018 VI 2018 IV IV 2017 VI 2017 IV IV 2016 VI 2016 IV IV 2015 VI 2015 IV IV 2014 VI 2014 XII 2018 XII XII 2017 XII XII 2016 XII XII 2015 XII XII 2014 XII VII 2018 VII VII 2017 VII VII 2016 VII VII 2015 VII VII 2014 VII VIII 2018 VIII VIII 2017 VIII VIII 2016 VIII VIII 2015 VIII VIII 2014 VIII

PCI Caprolactam USA Flake Export FOB USD/t

Source: Wood Mackenzie Chemicals

In the second half of 2019, caprolactam prices may increase driven by strengthening demand, as well as expected rises in crude oil and benzene prices. Towards the end of 2019, manufacturers are expected to reduce production to sell out their stocks by the end of December 2019. Regulations in international trade in caprolactam China is probably still assessing the situation to decide whether to extend the effective period of (or lift) the anti-dumping duty on caprolactam imports from the European Union and the US. The group of affected exporters includes Grupa Azoty Zakłady Azotowe Puławy S.A., for which the rate has been set at 4.4%. In line with the Chinese political programme for 2019, the VAT on chemical products was reduced from 16% to 13% as of April 1st 2019. Hydrogen peroxide market In the first half of 2019, the hydrogen peroxide market: • in Europe, remained stable with strong demand, trending downwards in June 2019. The availability of the product improved due to lower export volumes (to India and Brazil) and overhaul shutdowns at wood pulp producers; • in Israel, the availability of hydrogen peroxide from the Iberian Peninsula was constrained – some customers were eager to negotiate contracts for 2020 as early as in June/July 2019; • in Spain and Scandinavia, investment projects undertaken by wood pulp producers may significantly drive up demand for hydrogen peroxide in the second half of 2019; • in Germany, at the end of February 2019 a German company (the world’s largest specialist manufacturer of chemicals) announced plans to increase hydrogen peroxide capacity at its Belgian plant by 50% (approximately 60,000 tonnes per year) by 2020. This would improve the product availability in the region. In H1 2019, both year on year and relative to H2 2018, the market prices of hydrogen peroxide increased by 14.2% (or EUR 80/tonne). In H2 2019, demand for hydrogen peroxide in Europe will be growing slowly thanks to its applications in the paper bleaching industry and some niche segments with significant potential (electronics). 82 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Demand stability will be supported by strong demand for paper tissues and cardboard, with no capacity expansion for these products expected any time soon. According to analysts’ long-term projections, over the next 2–3 years new wood pulp production capacities (planned mainly in Russia) will drive the consumption of hydrogen peroxide in Europe. However, these volumes will be small compared with the current market supply of hydrogen peroxide, forcing the production units to continue at full capacity. RedNOx® market Integer Research analysts: • estimate AdBlue consumption in Europe in H1 2019 at 1.91bn litres, up more than 17% year on year; • forecast AdBlue consumption in Europe to reach 4bn litres for the year 2019, growing 18% year on year. In H1 2019, the largest AdBlue consumption was still recorded for vehicles with a maximum authorised mass exceeding 3.5 tonnes (including buses and trucks). The strongest growth in AdBlue consumption was seen in the segment of passenger cars and delivery vehicles, where the new Euro 6 emission standard spurred automotive producers’ interest in the SCR technology using a 32.5% urea solution to reach the required emission levels. 16 The issue now being considered by AdBlue market participants is how to handle the sale of the product on the passenger car market. The flue gas reduction market in the industrial sector, including mainly electricity and heat generation, is also subject to legislation on pollutant emissions. Both the number of participants in this market and their demand for SCR and SNCR reductants is steadily growing, including with respect to urea solutions and ammonia water. 17 In the first half of 2019, launches of new AdBlue production capacities in Western Europe, including Spain, France and the United Kingdom, were announced.

6.5. Agreements material for the Group’s business Grupa Azoty Zakłady Azotowe Puławy S.A. On May 23rd 2019, the Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A. and the following companies: Grupa Azoty S.A., Grupa Azoty Zakłady Chemiczne Police S.A., Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. and Grupa Azoty Kopalnie i Zakłady Chemiczne Siarki Siarkopol S.A. submitted statements confirming extension of the bilateral contracts concluded on June 21st 2017 (“Individual Contracts”) to the framework gas supply agreement signed with Polskie Górnictwo Naftowe i Gazownictwo S.A. (“PGNiG”) on April 13th 2016. Pursuant to the statements, PGNiG will remain the strategic supplier of gas to Grupa Azoty Zakłady Azotowe Puławy S.A. until September 30th 2022. The value of the bilateral contract executed between Grupa Azoty Zakłady Azotowe Puławy S.A. and PGNiG over its four-year term is estimated at PLN 4.1bn. The applied pricing formula is based on market gas price indices.

SCR (selective catalytic reduction) – a technology used for instance in Diesel engines, with the main purpose to reduce particulate matter (PM) emissions inside the engine and reduce increased emissions of nitrogen oxides (NOx). 16 17 SNCR – selective non-catalytic reduction of nitrogen oxides (NOx). 83 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

6.6. Pending court, arbitration or administrative proceedings Pending court proceedings The total value of claims brought by or against any of the Grupa Azoty PUŁAWY Group companies in court proceedings pending as at June 30th 2019:

Value of cases:

brought by the Company brought against the company

Company [PLN] [EUR] [PLN] [EUR]

Grupa Azoty Zakłady Azotowe Puławy S.A. 20,369*) 0 2,965 0

GZNF Fosfory Sp. z o.o. 1,535 0 18,864**) 0

Zakłady Azotowe Chorzów S.A. 141 0 42 0

AGROCHEM PUŁAWY Sp. z o.o. 6,170 0 73 0

PROZAP Sp. z o.o. 0 0 0 0

REMZAP Sp. z o.o. 0 0 28 0

SCF Natural Sp. z o.o. 0 0 0 0

Total 28,215 0 21,972 0

* Including: Claim against Ciech S.A. filed by Grupa Azoty Zakłady Azotowe Puławy S.A., seeking compensation of PLN 18,864 thousand from Ciech S.A. for breach of warranties given in the agreement for sale of shares in GZNF Fosfory Sp. z o.o. The proceedings were instigated on November 12th 2012; the case is pending. ** Claim brought by Ciech S.A. against GZNF Fosfory Sp. z o.o. on February 12th 2013 for redress of damage – the proceedings are suspended until the dispute between Grupa Azoty Zakłady Azotowe Puławy S.A. and Ciech S.A. is resolved.

External inspections at Grupa Azoty Zakłady Azotowe Puławy S.A. Grupa Azoty Zakłady Azotowe Puławy S.A. In H1 2019, 14 external inspections, including 8 sanitary inspections, were carried out at Grupa Azoty Zakłady Azotowe Puławy S.A. The inspecting bodies were: 1. Inspection and Oversight Department of the National Atomic Energy Agency in Warsaw – 1 inspection; 2. Department of Electricity and Heat Markets of the Energy Regulatory Office in Warsaw – 1 inspection; 3. Provincial Agricultural and Food Quality Inspectorate in Lublin – 1 inspection; 4. National Labour Inspectorate – Labour Inspector of the Regional Labour Inspectorate in Lublin – 1 inspection; 5. Provincial Inspector for Environmental Protection in Lublin – 1 inspection; 6. County Sanitary Inspector in Cieszyn – 1 inspection; 7. County Sanitary Inspector in Puławy (8 inspections).

84 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Following the inspections, Grupa Azoty Zakłady Azotowe Puławy S.A. of Puławy received: 1 recommendation, 1 statement and 5 decisions, of which 2 decisions pertained to external inspections carried out in 2018, while 1 decision concerned an external inspection carried out in 2017. Following an external inspection by the County Sanitary Inspector in 2018, a fine of PLN 138.50 was imposed on Grupa Azoty Zakłady Azotowe Puławy S.A. (under the Inspector’s decision of February 12th 2019), paid on March 1st 2019. Following the external inspection carried out in 2018 by the Provincial Inspectorate for Environmental Protection in Lublin, a fine of PLN 4,852,103.00 was imposed on Grupa Azoty Zakłady Azotowe Puławy S.A. under a decision of March 28th 2019, for excessive emissions into the air from the CHP plant, in volumes exceeding the set limits: – for sulfur dioxide – a fine of PLN 3,326,007.00; – for nitrogen oxides – a fine of PLN 1,521,105.00; – for particulate matter – a fine of PLN 4,991.00. On June 11th 2019, the Provincial Inspector for Environmental Protection issued 2 decisions postponing the deadline for payment of the fines referred to above, including: 1. Decision No. WI.7061.13.2019.SB of June 11th 2019 to postpone the payment deadline in respect of the administrative fine of PLN 1,521,105.00 for excessive emissions into the air of nitrogen oxides from the Company’s CHP plant in 2018 − unl December 31st 2021, i.e. completion date of the ‘Upgrade of steam generator No. 2 to reduce NO x emissions’ project.

2. Decision No. WI.7061.14.2019.SB of June 11th 2019 to postpone the payment deadline in respect of the administrative fine of PLN 3,330,998.00 for excessive emissions into the air of sulfur dioxide and particulate matter from the Company’s CHP plant in 2018 − unl June 30th 2021, i.e. completion date of the − ‘Replacement of sprinkler line ductwork inside the A-201scrubbing unit ‘ and − ‘Adapting of the Flue Gas Desulfurisation Unit to BAT LCP Conclusions’ projects. In H1 2019, administrative proceedings instigated following an inspection carried out by the State Fire Service between October 17th and November 24th 2017, as a result of which the Lublin Province Commander-in-Chief of the State Fire Service issued a decision not to approve the safety report for an upper tier establishment, were concluded with a decision upholding the Commander’s refusal. Currently, work is under way to prepare a new safety report for an upper tier establishment for Grupa Azoty Zakłady Azotowe Puławy S.A. Approval of the report by the Lublin Province Commander-in-Chief of the State Fire Service is a precondition for launching the ammonium nitrate-based granulated fertilizers unit. Grupa Azoty Zakłady Azotowe Puławy S.A. is implementing pro-environmental investment projects, which will serve as the basis for its applications to defer payment of the fines and to ultimately cancel them. 7. Other material information Dividend paid or declared by the Parent On June 24th 2019, the Annual General Meeting of Grupa Azoty Zakłady Azotowe Puławy S.A. passed Resolution No. 28 to pay dividend in a total amount of PLN 33,642,400.00 (PLN 1.76 per ordinary share) from the net profit for the financial year January 1st–December 31st 2018 and undistributed profit brought forward.

85 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

The dividend record date was set for July 2nd 2019, while the dividend payment date was July 18th 2019. The dividend was paid on that date.

Events subsequent to the reporting period

Registration of an amendment to the Company’s Articles of Association On July 11th 2019, the District Court for Lublin-Wschód in Lublin, with its seat in Świdnik, 6th Commercial Division of the National Court Register, registered an amendment to the Articles of Association of Grupa Azoty Zakłady Azotowe Puławy S.A. approved by Resolution No. 29 of the Annual General Meeting of June 24th 2019. The amendment to the Articles of Association of Grupa Azoty Zakłady Azotowe Puławy S.A. of Puławy consisted in inserting new letter c) in Art. 30.2.2) of the Articles of Association, reading as follows: “c) contracts for the purchase of electricity and related property rights, contracts for the purchase of CO 2 emission allowances”. The new consolidated text of the Company’s Articles of Association incorporating the above amendment was adopted by the Company’s Supervisory Board on August 1st 2019.

Tender procedure to select an audit firm for 2020−2021 On August 5th 2019, the Auditor Selection Preparation Team acting on behalf of the Supervisory Board of Grupa Azoty S.A. and the Supervisory Boards of its key subsidiaries (Grupa Azoty Zakłady Azotowe Puławy S.A., Grupa Azoty Zakłady Chemiczne Police S.A. and Grupa Azoty Zakłady Azotowe Kędzierzyn S.A.) announced a tender procedure to select an audit firm to audit the financial statements of the selected Grupa Azoty Group companies for 2020–2021, together with supplementary services comprising an audit of the financial statements for 2019 of the companies of the group whose parent is Goat TopCo GmbH of Münster, Germany, operating under the ‘Compo Expert’ brand. The bid submission deadline was set for September 2nd 2019.

8. Factors which in the opinion of the Management Board will affect the performance of Grupa Azoty Zakłady Azotowe Puławy S.A. and the Grupa Azoty PUŁAWY Group at least in the next half-year Events and factors which will have an impact on the financial results of the Grupa Azoty Zakłady Azotowe Puławy Group in the second half of 2019:

Prices of key feedstocks: natural gas, coal, electricity, benzene and sulfur; • Continued consolidation of the Grupa Azoty Group, including execution of strategic projects; • Foreign exchange rates (USD, EUR); • Situation in the agricultural sector and end-user industries; • Market conditions in industries which consume the Grupa Azoty PUŁAWY Group’s chemical products (textile manufacturers, carmakers, construction companies, plastics producers).

86 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

9. Position of the Management Board on the feasibility of meeting previously published forecasts

The Management Board of Grupa Azoty Zakłady Azotowe Puławy S.A. did not publish any financial guidance for the financial year 2019.

10. Opportunities, threats, and risks affecting the business and growth of Grupa Azoty Zakłady Azotowe Puławy S.A. and the Grupa Azoty Zakłady Azotowe PUŁAWY Group 10.1. Opportunities • Good outlook for the nitrogen fertilizers market in Central and Eastern European countries (EU-13) until 2027/2028 (forecast growth of approximately 10%); • Favourable forecasts for the Polish nitrogen fertilizers market until the 2027/2028 fertilizing season (consumption growth of approximately 6%); • Good forecasts for the Polish phosphate fertilizers market until 2027/2028 (consumption of phosphate fertilizers forecast by Fertilizers Europe to increase by over 12%); • Good outlook for the potassium fertilizers market until 2027/2028 in EU-13 (CEE countries) (growth of over 11%, including more than 3% in Poland); • Increase in farmers’ purchasing power, agricultural modernisation – direct payments from EU funds; • Continued favourable relationship between farm gate prices of agricultural produce and fertilizer prices; • Growing popularity of liquid fertilizers and greater awareness of their effectiveness; • Dynamically developing market of urea solutions (reductants, e.g. Noxy®, PULNOX®) in the automotive and power industry.

10.2. Threats • Political instability beyond Poland’s eastern frontier – the crisis in Ukraine; • Higher imports into Poland of nitrogen fertilizers from countries where cheaper natural gas is available, production capacities are high, and domestic demand remains low; • Sensitivity of the fertilizer industry to economic cycles; • Political unrest in some Middle East and African countries where the Company’s feedstocks are sourced; • Oversupply of caprolactam on the Chinese market and the possibility that China will become independent of caprolactam imports; • Investments in new nitrogen fertilizer capacities in regions where cheap natural gas is available; • Higher prices of strategic raw materials; • Global political unrest.

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11. The Group’s key risks For risk management, the Grupa Azoty PUŁAWY Group applies risk management principles based on the Enterprise Risk Management Policy for the Grupa Azoty Group. The policy defines a general framework for the risk management process, and its details are described in the ‘Enterprise Risk Management Instruction’ adopted by the Grupa Azoty PUŁAWY Group. In the Grupa Azoty PUŁAWY Group, the risk management process is implemented at the following companies: Grupa Azoty Zakłady Azotowe Puławy S.A., GZNF Fosfory Sp. z o.o., and Zakłady Azotowe Chorzów S.A. These companies are covered by a continuous process of identifying and evaluating risks and assessing the effectiveness of the risk management system, including the supervision of key risks management The process is overseen by the Chief Risk Management Officer.

11.1. Grupa Azoty Zakłady Azotowe Puławy S.A. Risk of increased imports of fertilizers The key cost driver for Grupa Azoty Zakłady Azotowe Puławy S.A.’s fertilizer production is the cost of natural gas. It directly affects the prices of the Company’s products, which have to compete with products of manufacturers that benefit from access to much cheaper sources of this feedstock. The Company takes steps to reduce production costs by modernizing its units, in compliance with BAT requirements; introducing new products to the product mix to match the high customer requirements and modern application methods; and operating a sales strategy based on strong links with leading distributors, complementary customer service, and shortening of the distribution channels on the foreign market. Within the Grupa Azoty Group, steps are being taken to maintain in force protective measures against imports of ammonium nitrate from Russia. The steps include active membership in Fertilizers Europe (the organisation of European fertilizer manufacturers), an active dialogue with the European Commission in the review proceedings initiated at the request of PJSC Acron and PJSC Dorogobuzh, as well as eight European farmer associations. In addition, the Company has undertaken cooperation with government agencies and Fertilizers Europe in preparation for the Brexit negotiations.

As regards the pending anti-dumping proceedings, the review proceedings concerning imports of ammonium nitrate from Russia, and in particular the dumping margin (initiated at the request of PJSC Acron and PJSC Dorogobuzh) and injury margin (initiated at the request of eight European agricultural associations) are almost complete. In addition, the European Commission has initiated anti-dumping proceeding concerning imports of mixtures of urea and ammonium nitrate from Russia, Trinidad and Tobago, and the United States of America (Announcement in the Official Journal of the EU of August 13th, 2018/C 284/08).

Risk of implementation or tightening of EU or local regulations imposing limitations on the application of the Company’s products The potential risk of limitations on the use of products manufactured at Grupa Azoty Zakłady Azotowe Puławy S.A. relates to ammonium-nitrate-based fertilizers, which in certain conditions may act as an oxidising agent. Ammonium nitrate is commonly used as a fertilizer in the EU. However, given its oxidising effect, all fertilizers containing ammonium nitrate should meet certain minimum safety standards before being placed on the market. PULAN® manufactured by Grupa Azoty Zakłady Azotowe Puławy S.A. is a high quality product, fully compliant with the Technical Provisions for Ammonium Nitrate Fertilizers of High Nitrogen Content

88 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

prescribed in Annex III of Regulation (EC) No. 2003/2003 of the European Parliament and of the Council of 13 September 2003 relating to fertilizers, as confirmed by the EC FERTILIZER certificate of conformity issued by the Polish Centre for Testing and Certification (Polskie Centrum Badań i Certyfikacji S.A.). The Company makes every effort to ensure that the entire process of manufacturing and distributing the product meets the trading safety requirements. It cannot be ruled out that regulations will be introduced in the future that will limit the use of products containing ammonium nitrate with a specific level of pure nitrogen that may adversely affect financial results of the Azoty Group Zakłady Azotowe Puławy S.A. Directive 2001/81/EC of the European Parliament and of the Council of 23 October 2001 on national emission ceilings for certain atmospheric pollutants was superseded by Directive (EU) 2016/2284 (the new NEC Directive) as of July 1st 2018. The NEC Directive establishes new or more stringent emission reduction commitments for the Member States’ anthropogenic atmospheric emissions of sulphur dioxide (SO 2), nitrogen oxides (NOx), non-methane volatile organic compounds (NMVOC), ammonia (NH 3) and fine particulate matter (PM 2.5 ), applicable from 2020 to 2029 and from 2030 onwards. The agricultural sector can expect new requirements concerning ammonia emissions from different types of mineral fertilizers. To comply with Directive 2016/2284, Poland will have to reduce its emissions of ammonia by: • 1% each year in 2010–2029, • 17% each year from 2030 onwards. With regard to mineral fertilizers, it is proposed that: • the use of ammonium carbonate be prohibited, • urea-based fertilizers be replaced by ammonium nitrate-based fertilizers. The use of urea-based fertilizers may continue if ammonia emissions from such fertilizers are reduced by at least 30%. By 2030, the required reduction of ammonia emissions may require partial replacement of urea with ammonium nitrate. The Agro Segment’s research and development work focuses on new speciality fertilizers, including those enabling increased nutrient uptake by slowing down their undesirable changes in soil conditions. The Company’s R&D plan provides for the adaptation of urea-based fertilizers to the anticipated changes in EU law on limiting NH 3 emissions (NEC Directive) and enhancement of the product portfolio to include speciality fertilizers. The research covers assessment of the effect of urea-based fertilizer products with an addition of an inhibitor on physical, chemical and microbiological properties of soil and plant productivity, taking into account the air emissions of ammonia. Further research will include agricultural tests with selected inhibitors. The work will be carried out under the supervision of Grupa Azoty Zakłady Azotowe Puławy S.A. in cooperation with Grupa Azoty Group companies.

Risk related to prices and availability of natural gas The purchase price of natural gas is the main component of the Company’s production costs. The Company procures gas mainly from PGNiG S.A. In order to optimise the structure of gas sources and reduce costs, the Company trades on the Polish gas exchange market. The agreements executed by the Company provide for supply flexibility so the purchase volumes can be more accurately adjusted to the Company’s daily requirements and price expectations.

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Volumes are contracted for long-term periods and, if necessary, short-term and SPOT contracts are also concluded. Gas prices paid by the Company are based on market prices. The availability and prices of gas are monitored on an ongoing basis. The Company has relevant corporate procedures in place to be followed in case of gas supply constraints. The Company has access to alternative sources of ammonia. The increased storage capacities available following completion of the new ammonia storage and distribution facility have significantly improved Grupa Azoty Zakłady Azotowe Puławy S.A.’s flexibility in managing the ammonia stocks. In H1 2019, the prices of natural gas in Europe were on a downward trend. From the beginning of the year, the price of natural gas fell by approximately 55%. The decline in natural gas prices was primarily attributable to the mild winter (both in Europe and Asia), coupled with an appreciable oversupply of LNG on global markets. Due to a decline of gas prices in Asia, more LNG supplies were destined for Europe. The downward price trend was additionally strengthened by a decline in coal prices and high level of stocks both in Poland and Europe. Due to the mild winter and numerous LNG supplies, the European Union’s stocks are exceptionally high, at 72.5% of the capacity. As at the end of H1 2019, the Polish storage facilities were filled to 66.6% of the capacity.

Risk related to the process of planning and implementing strategic projects Grupa Azoty Zakłady Azotowe Puławy S.A. is implementing the Strategy of the Grupa Azoty Group for 2014–2020, which includes projects specified in the Capital Expenditure Plan for the next financial years. The Company plans and carries out investment projects designed to increase its competitive advantage on the market. In order to mitigate the risk inherent in the investment decision-making process, the Company has implemented internal policies which clearly define and govern the preparation and implementation of projects. An important aspect of project execution is change management, in which special attention is given to changes in foreign exchange rates, prices of raw materials, equipment and instruments, as well as requirements to be satisfied by new units. Analyses are carried out which then serve as a basis for updating execution schedules and expenditure budgets. In addition, controlling officers monitor the performance of projects to identify potential threats. The regulations in place also take into account the requirements related to the obligations imposed on beneficiaries of EU subsidies granted for the execution of projects co-financed with aid funds.

Risk related to reduced sales of fertilizer products of the AGRO segment at Grupa Azoty Zakłady Azotowe Puławy S.A. The implementation of certain EU regulations into Polish law may limit the use of nitrogen fertilizers. This concerns the following two directives: Nitrates Directive – Council Directive of 12 December 1991 concerning the protection of waters against pollution caused by nitrates from agricultural sources (91/676/EEC). In Poland, the Water Law of July 20th 2017 applies, regulating water protection and containing a controversial ban on the use of nitrogen fertilizers in the first round of fertilizing before March 1st, irreconcilable with the nutrient needs of crop plants (rape seed and grains). In practice, taking into account the soil and climate conditions, nitrogen fertilizers have first been applied to wheat and rapeseed, particularly in the western part of Poland, in February, provided the weather was suitable. The risk lies in reduced use of the Company-manufactured Pulan®, RSM®, RSM®S fertilizers in the first round of fertilizing, which could harm sales.

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Directive (EU) 2016/2284 of the European Parliament and of the Council of 14 December 2016 on the reduction of national emissions of certain atmospheric pollutants, amending Directive 2003/35/EC and repealing Directive 2001/81/EC (“NEC Directive”), intended to support Member States in achieving an improvement in air quality to eliminate the negative impacts on and risks to human health and the environment. The NEC Directive has established emission reduction commitments for the Member States’ anthropogenic atmospheric emissions of sulfur dioxide (SO 2), nitrogen oxides (NO x), non- methane volatile organic compounds (NMVOC), ammonia (NH 3) and fine particulate matter (PM 2.5 ); it also requires the Member States to prepare, adopt and implement national air emission reduction programmes. The risk consists in possible elimination or reduction of the use and sales of Company-manufactured fertilizers (Pulrea®, Pulgran®, Pulgran®S, RSM®, RSM®S) due to restrictions on their use in Poland. The regulations have not yet been transposed into Polish law. The Grupa Azoty Group is holding meetings with the Ministry of Agriculture and Rural Development to convince it of the need for amending the Water Law and introducing regulations that would not expose Polish agricultural producers to the risk of losing their market shares and would thus prevent a drop in the production and sales of fertilizers on the Polish market. To this end, the Company has prepared analyses and presented relevant information. It is in the interest of the Grupa Azoty Group to cooperate with the Ministry of Agriculture and Rural Development: if the Group makes the relevant information and its expectations known to the Ministry, it will be able to achieve more in the final or amended versions of the legislative acts referred to above. Additionally, the Polish legislation may restrict imports of urea from abroad, which would be beneficial to the Polish fertilizers market. The Group takes seriously the concept of sustainable development with due regard for the environment. It is strongly committed to sharing knowledge on mineral plant nutrients with farmers. For several years now the ‘Grounded in Knowledge’ programme has been developed by the Company, under which free soil tests are performed at farms, covering the macro-nutrient content and pH. We want to teach farmers how to act knowledgeably, manage the fertilization process so as to optimise yields, and be aware of the nutrient needs of plants. On the other hand, if the sales of fertilizers drop, the Company may diversify production. A stream of urea can to some extent be redirected to melamine, NOxy or UAN production.

Risk related to the availability and uninterrupted supply of coal At Grupa Azoty Zakłady Azotowe Puławy S.A., thermal coal is the key feedstock used to generate electricity, heat and process steam. For the continuous operation of the CHP plant, the main priority is to ensure adequate quantities of coal with specific parameters. An adequate structure of coal supplies sourced exclusively from domestic suppliers supports the continuity and stability of electricity and heat generation. The main supplier of coal to Grupa Azoty Zakłady Azotowe Puławy S.A. is Lubelski Węgiel Bogdanka S.A. operating a coal mine in the Province of Lublin. Coal from the Bogdanka mine is delivered to the

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Company under a long-term contract. To supplement the procurement portfolio, it also purchases low- sulfur coal from Silesian mines in the Province of Katowice. The Company is required to maintain mandatory coal stocks at a statutory level representing a thirty- day consumption volume. It also has in place internal regulations on coal stocks management, to ensure the continuity of coal supplies and safe management of its stocks.

The risk of a negative impact of the increase in CO 2 emission allowances on the financial result The technological processes employed by the Company produce air emissions of greenhouse gases, which are subject to stringent legal regulations. The need to comply with those regulations entails expenses, which have a bearing on the Company’s financial condition. Under the regulations currently in effect, the Company is required to put in place organisational and technical solutions enabling it to fulfil the requirements on measuring and recording emission parameters for control/inspection purposes and effectively manage the allocated allowances, as well as to implement relevant procedures for purchasing additional allowances in case of deficit. In accordance with the applicable procedures, the risk of an adverse effect of EUA prices on the EU ETS market is mitigated by averaging the prices of emission units purchased. In line with the EU ETS Management Committee’s incremental procurement strategy, in 2019 purchases will be made throughout the year. At the end of each quarter, the Company will purchase at least one-eighth of the target annual volume. The remaining quantities will be purchased if the prices of emission allowances fall. The Company purchases CO 2 emission allowances through investment firms (meeting legal requirements under the MiFID II Directive) with which it has signed framework agreements. The Company has implemented a system for monitoring emissions covered by the EU ETS requirements, and balances greenhouse gas emissions on an ongoing basis. To comply with the emissions monitoring requirements and for allowance management, the Company has established organisational units responsible for the technical aspects of emissions monitoring and balancing; preparing an annual allowance purchase plan; recording and identifying potential threats and risks in the area of emissions management; and taking active measures to limit their potential impact on financial performance. The Company monitors all developments related to the EU ETS market and reacts to any changes in legal regulations governing the EU ETS.

Risk related to new legal requirements applicable to production processes Grupa Azoty Zakłady Azotowe Puławy S.A.’s production processes lead to emissions of pollutants and generation of waste. As more and more stringent legal regulations are introduced, the Company’s technological solutions need to be brought into compliance with new requirements. The changes mainly concern tightening of the emission limits for SO 2, NOx, ammonia, particulates and other emissions (in the implementation of the IED Directive, work on new limits of permissible BREF emissions for the chemical industry is underway). To ensure compliance of its technological solutions with the legal requirement, the Company monitors work on the planned changes to the regulations and requirements. Parameters of the technological processes are monitored and steps are taken to keep them within the limits defined in legal regulations or the environmental permits. When preparing investment projects, the Company takes into account best available technologies.

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Directive (EU) 2016/2284 of the European Parliament and of the Council of 14 December 2016 on the reduction of national emissions of certain atmospheric pollutants introduces new reduction commitments for ammonia emissions from the mineral fertilizers applied, mainly urea. Accordingly, work was carried out to coat prilled urea with commercially available urease inhibitors, with a view to reducing the gaseous ammonia escape from the fertilizer during its decomposition in soil. Subsequently, in cooperation with the Institute of Soil Science and Plant Cultivation – State Research Institute, tests were performed to select the most efficient urease inhibitor. Preparatory work is under way to carry out multi-year field tests with urea coated with selected inhibitors.

Risk of serious industrial accidents or technical failures resulting in disruption of operations and stoppage of key manufacturing units In the course of its operations, Grupa Azoty Zakłady Azotowe Puławy S.A. handles large quantities of hazardous chemical substances, which pose the threat of fire, explosion or release of toxic substances. The possible causes of technical failures and accidents include defective materials, structural defects, wear and tear, exceeding critical process parameters, failure of I&C systems, human error, and external factors. The single most serious source of risk of industrial accident with a potentially disastrous impact extending beyond the area of Grupa Azoty Zakłady Azotowe Puławy S.A.’s operations is damage to tanks containing ammonia, oleum and CO 2. Grupa Azoty Zakłady Azotowe Puławy S.A. is strongly committed to achieving high standards of safety and environmental protection, and declares its readiness to ensure means and resources necessary to accomplish this objective. Accidents are prevented, and their impacts are mitigated, by means of: • technological solutions (state-of-the art process design, computerised control systems, and I&C equipment) to reduce the probability of accidents; • procedural safety measures (safety policies, staff recruitment and training system, emergency procedures), which help to reduce leakage volumes; • technical safety measures (alarms and locks, safety valves, sprinkler systems, trays under tanks) to reduce the physicochemical effects of emergency outflows, i.e. the extent of possible outbreaks, fires and contamination; • operational and rescue measures to reduce the amount of losses caused by outflows and their further effects. The aim of the Company’s efforts is to ensure uninterrupted operation of its production units, in accordance with the highest standards set forth in applicable regulations. The Company has been undertaking the above organizational and technical activities for many years to reduce the risks associated with its operations. The Parent applies state-of-the-art technologies when modernising existing facilities or constructing new units. Such efforts systematically contribute to mitigating the negative environmental impact of its operations. The Company maintains resources and measures necessary to carry out rescue operations, such as the Company Fire Brigade and chemical rescue teams in production units. Drills are conducted on a regular basis to: - ensure that analyses of potential emergency situations are performed regularly, - improve cooperation between individual in-house emergency response teams,

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- check the efficiency of employee evacuation procedures in practice, - check the operation of warning systems. In order to prevent, counteract and mitigate the effects of industrial accidents, Grupa Azoty Zakłady Azotowe Puławy S.A. has introduced an emergency response plan. Their relevance is assessed by external inspection authorities, as well as accreditation/certification bodies. All post-inspection instructions are complied with within the prescribed deadlines, and the Company’s care for safety is evidenced by the number of certificates it holds.

11.2. GZNF Fosfory Sp. z o.o. Risks related to waste and by-product management GZNF Fosfory Sp. z o.o.’s by-product is sodium bisulfite, produced at GZNF Fosfory Sp. z o.o.’s alkaline absorption unit from residual gas generated at the sulfuric acid unit. At present, GZNF Fosfory Sp. z o.o. sells its sodium bisulfite output to one customer, which uses the product as key feedstock in its production process. To mitigate the related risk, the company’s sales team is in close contact with the buyer of sodium bisulfite to monitor the continuity of the product offtake. GZNF Fosfory Sp. z o.o. has also taken steps to develop, in cooperation with Grupa Azoty Zakłady Azotowe Puławy S.A., a technology for production from the residual gas of other products that may be used in agriculture. Once the new technology is deployed, the company will be able to maintain the existing sulfuric acid production capacities while keeping sulfur oxide emissions within the limits defined in the integrated permit. The new technology will also help diversify the customer base for the new product. The Company has in place a response plan should it be necessary to temporarily store a significant amount of sodium bisulfite.

Risk related to growing customer requirements concerning the company’s products GZNF Fosfory Sp. z o.o.’s main products are phosphate and compound fertilizers, with phosphate rock being one of the key raw materials for their production. Phosphate rock includes not only phosphate but also heavy metals such as cadmium. In the European Union, steps have been taken to introduce regulations (subject to transition periods) designed to limit the cadmium content in fertilizers, which, due to limited global resources of low cadmium phosphate rock, may affect the production of the main fertilizer products at GZNF Fosfory Sp. z o.o. To mitigate the risk, the company, in cooperation with Grupa Azoty S.A., is conducting market analyses to identify sources of the raw material that would meet the EU’s requirements.

Risk of deteriorated supply-demand balance GZNF Fosfory Sp. z o.o. derives revenue mainly from the sale of fertilizer products, thus the company’s operations are strongly affected by changes in demand for compound and phosphate fertilizers. The key factors that may weigh on demand for compound and phosphate fertilizers include: • customers scaling down their purchases due to the need to reduce their own production, • suspension of fertilizer purchases by customers that are uncertain about what own output volumes they will be able to sell, oversupply of complementary products from other market participants,

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• customers/farmers receiving only a part of direct payments or receiving such payments after a long delay, which would significantly and adversely affect their purchasing power during the agricultural season, • uncertainty of weather conditions (risk of frost), drought or floods occurring in agricultural areas, which may result in reduced purchases of fertilizers by farmers. To mitigate impact of the risks, the company closely monitors the market. It takes proactive measures, i.e. it diversifies distribution channels, takes steps to strengthen the market position of product brands, and launches new fertilizer products based on components currently produced by the company.

Risk of increased imports of fertilizers One of the most important factors affecting farmers’ purchasing decisions is the final price of the product. A temporary increase in the volume of fertilizers imported at prices which are much lower than those offered on the market may lead to a situation where prices of the company’s products would not be competitive. To mitigate the risk, the company monitors fertilizer imports and market prices in close cooperation with the Grupa Azoty Group. The company markets new fertilizer products with an excellent quality/price ratio, operates a sales strategy based on cooperation with leading distributors, and employs targeted marketing strategies. Risk of losing market positions by the company’s product brands Amofoski (low-concentration compound NPK fertilizers) is among GZNF Fosfory’s main fertilizer product brands. For several years now, the activity of importers of high-concentration NPK fertilizers to Poland at very low prices has been growing. Such imports originate mainly in Russia, which is able to supply fertilizers at dumped prices to individual markets, owing to its own sources of raw materials. The increasing market share of imported high-concentration compound fertilizers has been forcing low-concentration Polish products out of the market, thus reducing the market shares of fertilizers manufactured at GZNF Fosfory Sp. z o.o. In order to mitigate this risk, the company has begun to market compacted fertilizers – more advanced speciality fertilizers manufactured in a new production unit. Moreover, analyses are being carried out concerning new fertilizer formulas which GZNF Fosfory Sp. z o.o. would be able to manufacture.

11.3. Zakłady Azotowe Chorzów S.A. Risk related to the operation of the power generation system The reliable operation of the power generation system at Zakłady Azotowe Chorzów S.A. is of significant importance to the company and its customers who purchase electricity and other energy carriers (steam, heating water or water) under contracts. The Chief Electrical Maintenance Engineer’s unit is responsible for ensuring the security of electricity supplies. Periodic inspections of electrical switchgears are carried out in accordance with adopted instructions, damaged or obsolete electric cables are gradually replaced, and the resistance of electric circuits is measured. Operational stability of the system is also guaranteed by offtake contracts with electricity consumers, providing for the required power consumption levels. The active power consumption/offtake by both

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external and internal customers, as well as the reactive power factor, are monitored on an ongoing basis. The security of process steam and heat supplies is guaranteed by diversification of production sources. Continuous generation availability of all steam generators is maintained. Continuous monitoring of coal stocks in storage yards and of fuel oil in tanks is also carried out. The company has in place diversified agreements with coal suppliers. The steam generators are regularly cleaned and inspected in accordance with the requirements of the Office of Technical Inspection (UDT).

Risk related to management measures designed to achieve an optimum level of inventories of raw materials and finished goods The Company is in the process of implementing an operation and production planning system, complete with inventory projection, with a view to avoiding excessive inventories of both raw materials and finished products (stock volumes should be consistent with actual needs) and securing against a shortage of feedstock or finished products required to meet production or sales targets. In the process, buffer volumes of strategic raw materials were determined, that is volumes required for 14 to 21 days of production. Steps were also taken to optimise (reduce) the stocks of finished products. The product inventory management measures are designed to optimise stock levels in such a way as to guarantee proper performance of executed supply contracts at the lowest possible prices of raw materials. Risk of deteriorated supply-demand balance The conditions on the market for Zakłady Azotowe Chorzów S.A.’s products require the company to look for solutions that would enable the company to achieve its financial targets. The company monitors the market and takes appropriate steps to satisfy its customers’ needs. The company adjusts its product mix to customers’ expectations in terms of quality and price, and takes measures designed to effectively compete with other market players. In June 2019, demand for both food grade and technical grade potassium nitrate dropped. This was attributable to increased competition on the market, as Uralchem completed overhaul work, and SQM increased supplies of its products to the EU market. In the following months, the trend of relatively strong competition expansion is expected to continue. There is also a risk of oversupply due to the idle season.

Risk of increased imports of fertilizers In order to minimise the risk related to increased imports of fertilizers (from Europe, China, Russia and America), Zakłady Azotowe Chorzów S.A. is enhancing its product offering to include speciality products and special types (granulations) of food grade and technical grade potassium nitrate, as well as compound NPK fertilizers for horticulture, arboriculture and greenhouses. The raw materials used in their production include Zakłady Azotowe Chorzów S.A.’s key products, such as: calcium nitrate and potassium nitrate, which will bring down the fertilizer production costs. The risk can materialise through: • a periodic increase in the volumes of fertilizer imports from other EU countries and China; • unfavourable development of the PLN/EUR exchange rate in the typical periods of increased sales.

Risk of short-term liquidity loss To ensure that Zakłady Azotowe Chorzów S.A. is able to continue as a going concern it is crucial to secure its financial liquidity, i.e. the ability to meet its liabilities as they fall due. 96 Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and of the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019

Following a share capital increase, the company is implementing measures defined in its Turnaround Plan for 2017–2027. Funds from the issue of new shares were applied towards partial repayment of the loans received by the company from Grupa Azoty Zakłady Azotowe Puławy S.A. The balance will be used to finance investment projects and working capital. The forecast of cash flows included in the updated annual plan assumes that cash available at the end of 2019 will enable the company to timely pay its trade payables and interest on a loan received. At present, there is no reason to believe that the company will not be able to meet its liabilities in the future, but a necessary condition for it to maintain liquidity and deliver target performance will be its ability to achieve revenue and margin targets.

Representation by the Management Board We hereby represent that the Directors’ Report on the operations of Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna and the Grupa Azoty PUŁAWY Group for the six months ended June 30th 2019 gives a true view of the Company’s and of the Group’s development, achievements and position, including a description of key threats and risks affecting the Company and the Group.

Krzysztof Bednarz President of the Management Board

Vice President of the Krzysztof Homenda Management Board

Vice President of the Izabela Świderek Management Board

Vice President of the Anna Zarzycka-Rzepecka Management Board

Member of the Andrzej Skwarek Management Board