DIRECTORS’ REPORT ON THE OPERATIONS OF ZAKŁADY AZOTOWE PUŁAWY SPÓŁKA AKCYJNA in the period July 1st 2010 – June 30th 2011

August 2011

Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Contents 1. Basic information on the Company……………………………………………………… 3 1.1. Shareholder structure……………………………………………………………………………. 3 1.2. Organisation………………………………………………………………………………………….. 4 2. Growth prospects……………………………………………………………………………….. 5 3. The Company’s operations in the financial year 2010/2011………………… 7 3.1. Results …………………………………………………………………………..………………….….. 7 3.2. Trading policy and sales…………………………………………………………………………. 9 3.3. Supply of strategic resources...... …………... 15 3.4. Production...... 16 3.5. Segment discussion and analysis...... ……………………….. 17 3.6. Financial policy and financial risk management……………………………………… 20 3.7 Non-current assets……………………………………………………………………………….. 25 3.8. Investment projects...... …….. 26 3.9. Research and development…………………………………………………………………… 32 3.10 Strategic projects…………………………………………………………………………………… 33 3.11 Environmental protection……………………………………………………………………… 35 3.12 Workforce…………………………………………………………………………………………….. 38 3.13. Company's performance on the capital market…………………………………….. 40 3.14. ZA Puławy’s position in rankings……………………………………………………………. 41 3.15. Sponsorship activities……………………………………………………………………………. 42 External environment, factors and events with a bearing on the Company’s 4. 44 operations, financial performance and growth…………………………………… 5. Projected financial standing……………………………………………………………….. 52 6. Opportunities, threats and risks…………………………………………………………. 53 7. Management and supervisory staff……………………………………………………. 58 8. Other information……………………………………………………………………………… 61

Appendix 1 Statement of Compliance with Corporate Governance Principles

2 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

1. Basic information on the Company

Legal form: A joint-stock company incorporated under the Polish law.

Duration of the Company: Indefinite.

Founders: The State Treasury represented by the Minister of State Treasury.

Entry in the National Court Register: The Company is entered in the National Court Register maintained by the District Court of Lublin-Wschód in Lublin with its seat in Świdnik, VI Commercial Division, under the name of Zakłady Azotowe “Puławy” Spółka Akcyjna and under No. KRS 0000011737.

Core business:  Manufacture of basic chemicals, fertilisers and nitrogen compounds, plastics and synthetic rubber in primary forms;  Manufacture of other chemical products;  Manufacture of man-made fibres;  Manufacture of rubber and plastic products;  Production and supply of electricity, gas, steam, hot water and air for air-conditioning installations;  Water supply; sewerage, waste management and remediation activities;  Wholesale trade, excluding sale of automotive vehicles;  Retail trade, excluding sale of automotive vehicles.

Product range Fertiliser products:  Urea-ammonium nitrate solution (UAN – RSM®)  Ammonium nitrate  Urea  Ammonium sulphate Non-fertiliser products:  Melamine  Liquid and solid caprolactam  Hydrogen peroxide  AdBlue®  Urea solutions  Liquid carbon dioxide  Dry ice  Ammonia water  Nitric acid  Compressed hydrogen  Electricity  Heat Other: 1  ERUs 2  EUAs  Certificates of origin for electricity

1.1. Shareholder structure

The share capital of ZA Puławy 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 entitling its holder to one vote at the General Shareholders Meeting. The Company’s Articles of Association do not provide for any limitations on the exercise of voting rights attached to the Company shares.

1 Emission Reduction Units 2 European Union Allowances 3 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Shareholder structure of ZA Puławy as at June 30th 2011*: Number of votes Number of % share in share % of total vote Shareholder* attached to the shares held capital at GM shares State Treasury 9,686,248 50.67% 9,686,248 50.67% Kompania Węglowa S.A. 1,892,385 9.90% 1,892,385 9.90% Zbigniew Jakubas and 986,900 5.16% 986,900 5.16% related parties ING Nationale 959,431 5.02% 959,431 5.02% Nederlanden Polska OFE Others 5,590,036 29.25% 5,590,036 29.25% * The shareholder structure is reported on the basis of notifications provided by the shareholders to the Company.

In the financial year 2010/2011, there were no changes in major holdings of the Company shares. In the period July 1st 2010–June 30th 2011, the Company did not acquire its own shares. As at June 30th 2011, none of the subsidiary or associated undertakings held shares in ZA Puławy S.A.

1.2. Organisation

ZA Puławy Group

Organisation of the ZA Puławy Group

The ZA Puławy Group consists of ten companies incorporated under commercial law, including the Parent Undertaking and seven subsidiaries, in which the Parent Undertaking holds more than 50% of the share capital, as well as two subsidiaries of Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o.

Founders of the Parent Undertaking: the State Treasury represented by the Minister of State Treasury.

Parent Undertaking in the National Court Register: The Parent Undertaking is entered in the National Court Register maintained by the District Court of Lublin-Wschód in Lublin with its seat in Świdnik, VI Commercial Division - National Court Register, under the name of Zakłady Azotowe “Puławy” Spółka Akcyjna and under No. KRS 0000011737.

Structure of the Group as at June 30th 2011:

Zakłady Azotowe Puławy Spółka Akcyjna

Number of shares (%) % of total vote at GM 99.96 89.46 GDAŃSKIE ZAKŁADY D. W. JAWOR Sp. z o. o. NAWOZÓW FOSFOROWYCH 99.96 89.46 FOSFORY Sp. z o.o.

91.41 100 MEDICAL Sp. z o. o. AGROCHEM Sp. z o.o. 93.15 100 OF DOBRE MIASTO

84.69 100 AGROCHEM Sp. z o.o. PROZAP Sp. z o. o. 85.57 100 OF CZŁUCHÓW

94.61 REMZAP Sp. z o. o. 95.73

96.15 STO - ZAP Sp. z o. o. 98.13

100 MELAMINA III Sp. z o. o. 100 4 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

ZA Puławy S.A. also holds equity interests in the following companies:  Bałtycka Baza Masowa Sp. z o.o. (50.0% interest in the share capital);  CTL Kolzap Sp. z o.o. (49.0% interest in the share capital);  Navitrans Sp. z o.o.: 26.45% interest in the share capital;  Technochemservice S.A. (25.0% interest in the share capital).

Through its subsidiaries Przedsiębiorstwo Projektowania Modernizacji i Rozwoju Z.A. Puławy S.A. PROZAP Sp. z o.o., Przedsiębiorstwo Wykonawstwa Remontów i Inwestycji Remzap Sp. z o.o. and Przedsiębiorstwo Żywienia Zbiorowego i Usług Sto-zap Sp. z o.o., the Parent Undertaking holds indirectly 1.46% of the total vote at the general shareholders meeting and 1.44% of the share capital of Zakład Opieki Zdrowotnej Medical Sp. z o.o.

Additionally, through its associated undertaking Bałtycka Baza Masowa Sp. z o.o., ZA Puławy holds (indirectly) 13.22% of the total vote at the general shareholders meeting of Navitrans Sp. z o.o.

In the period July 1st 2010–June 30th 2011, there were changes in the structure of the ZA Puławy Group. On April 27th 2011, ZA Puławy S.A. purchased 51,855 shares in Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o., representing 89.46% of the company's share capital, and thus became the parent undertaking of Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o.

2. Growth prospects

In recent years, the international market of chemicals and fertilisers has seen significant changes in business models. In , we have witnessed fast consolidation among manufacturers, as well as strengthening and market concentration of distributors of products for the agricultural sector. The most significant changes of material importance for the Company's growth prospects have included:  the economic crisis, which particularly affected the chemicals and the fertilisers segments;  further concentration of the fertilisers distribution market;  relatively high natural gas prices, and in a short-term lack of viable alternatives for purchasing gas from other sources;  increasing fertiliser imports into Poland;  growing production capacity of the ZA Puławy Group;  mergers and acquisitions in the chemical industry in Poland and globally.

The strategy of the ZA Puławy Group is focused on shareholder value, which makes it compelling not only for investors, but also for the Company's employees, customers and other stakeholders. ZA Puławy Group's products are purchased by customers representing two large branches of the economy, namely the agriculture and the commodity chemicals processing industry. As far as agriculture is concerned, the Company's activities have been based on the concept of development of a product and service offering through a continuous improvement of logistics, advisory and operating capabilities necessary to support the sector. For its customers from the chemical sector, the Company wishes to be a supplier who improves the their competitiveness on the global market.

In line with the Updated Strategy of Zakłady Azotowe Puławy S.A. for 2011–2017 (Key Directions of Strategic Development), adopted by the Supervisory Board of ZA Puławy on May 5th 2011, the ZA Puławy Group has been placing an increasing focus on strengthening its market orientation. In the document, ZA Puławy's Management Board has presented a new vision, which provides for strengthening of the ZA Puławy Group's position, for instance through enhancement of its market and production potential. “By 2017, the ZA Puławy Group aims to evolve from a leading producer of nitrogen fertilisers and chemicals in Central Europe into a strong chemicals and fertilisers group, controlling an extensive value chain, offering an attractive mix of products, and being closer to its end customer”. The document provides that the ZA Puławy Group will be pursuing its strategic objectives through acquisitions and alliances, as well as through organic growth. As part of activities undertaken on the first of the two paths of growth, ZA Puławy have successfully completed the takeover of Gdańskie Zakłady Nawozów Fosforowych (GZNF Fosfory) through the acquisition of 89.46% of its shares. GZNF Fosfory is the parent undertaking of two subsidiaries: AGROCHEM Sp. z o.o. of Dobre Miasto and AGROCHEM Sp. z o.o. of Człuchów. The acquisition of GZNF Fosfory by ZA Puławy has created a unique player on the Polish fertiliser production 5 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011 market, integrating manufacturing and distribution. It has been an important step in the consolidation of the Polish compound fertiliser production industry. The combined entity offers the full product range as far as nitrogen and compound fertilisers are concerned. GZNF Fosfory's product offering can be adjusted to better respond to the market needs and capabilities if new fertilisers based on urea, phosphorus and potassium are added and some of the products currently on offer are given up. The revenue sources will be further diversified once the company commences to offer cargo-handling services. The acquisition has strengthened the Company's competitive position thanks to the broadening of the distribution network through its amalgamation with GZNF Fosfory's (the Agrochems') own distribution network, giving direct access to the end customer – the farmer. It has also enabled the Company to expand its distribution offering through the addition of other products for the agricultural sector, and to develop a comprehensive offering tailored to the individual needs of high net worth clients. Acquisitions and takeovers focused on developing of distribution operations, expanding the product range, and extending the product value chain, lie at the core of ZA Puławy's strategic interests.

ZA Puławy has been increasing the value of its assets also by raising its production capacities. In April 2011, a very important project , i.e. Modernisation of the Oxygen Generation Plant – Ammonia – Urea Production Line, was completed. It encompassed construction of a new generation plant on an over-the-fence basis, and improvement of an ammonia and urea production installation capacity by approximately 25%. Other projects included Construction of Flue Gas Desulphurisation Unit at the Company's CHP plant, Construction of the New Fertiliser Production Facility – Production of Liquid and Solid Fertilisers based on urea and ammonium sulphate, or Construction of Ammonia Storage and Distribution Facilities. Another project – Production Facility for Granulated Fertilisers based on ammonia nitrate – is at the designing stage. Careful about building the value of its assets, the Group has been developing its intellectual capital by collaborating with institutes and research centres to create new competences to support sales of new products or finding new uses for existing ones. In pursuit of this area of interest, the Group intends to establish the Puławy Competence Centre, the objective of which will be to create a platform for collaboration between project participants in order to implement projects fostering a modern model of an agricultural entrepreneur, to raise farmers' competence in efficient management of their businesses, to popularise research in soil fertilising, and to build new relationships between business and the academic world. ZA Puławy is an active participant of decision-making processes as far as market regulation is concerned, both within the EU and within Poland, which influences the Group's economics. The Company's efforts in this area are directed towards:  relevant committees of the European Parliament responsible for preparation of decisions which are to regulate the chemical, power, and agricultural markets,  European offices and institutions having influence on various aspects of operations of the ZA Puławy Group,  ministries, authorities and central institutes in Poland,  regional and local authorities and institutions whose decisions affect the security and costs of functioning of the ZA Puławy Group. ZA Puławy actively participates in the works of opinion-making associations in the chemical industry, such as Fertilisers Europe or the Polish Chamber of Chemical Industry. In the financial year 2010/2011, Paweł Jarczewski, President of the Company's Management Board, was appointed as Vice-President of Fertilisers Europe.

6 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

3. The Company’s operations in the financial year 2010/2011

3.1. Results

Highlights of the statement of comprehensive income

Jul 1 2010 Jul 1 2009 Change (%) PLN '000 – Jun 30 2011 – Jun 30 2010 1 2 3 4=(2/3) Operating income 2,831,168 2,070,287 136.8

Operating expenses (2,552,767) (2,055,103) 124.2

Operating profit/(loss) 278,400 15,183 1,833.6

EBITDA 360,888 82,166 439.2

Pre-tax profit/(loss) 293,762 46,938 625.8

Net profit/(loss) 226,068 35,535 636.2

Structure of costs by nature (%)

Jul 1 2010 Jul 1 2009 Item – Jun 30 2011 – Jun 30 2010 1 2 3 Depreciation/amortisation of non- 3.4 3.3 current assets Raw materials and energy used 71.0 69.8 Contracted services 12.0 11.5 Salaries and wages 8.3 9.5 Employee benefits 1.9 2.3 Taxes and charges 3.0 3.2 Other costs 0.4 0.4 Total costs by nature 100.0 100.0

The key items of costs by nature in the period July 1st 2010 – June 30th 2011 were represented by costs of raw materials, energy used and contracted services, which accounted for 83.0% of the total costs. With an aggregate share of 86.7%, natural gas, electricity, benzene and coal were the largest items in the costs of raw materials and energy used. The largest share of contracted services is represented by repairs/overhauls (31.1%) and road transport (35.0%).

Costs by function

Jul 1 2010 Jul 1 2009 – Jun 30 2011 – Jun 30 2010 3/5 PLN ‘000 Structure Amount in Structure Amount in change (%) (%) PLN ‘000 (%) PLN ‘000 1 2 3 4 5 6 Technical cost (= direct costs + works overheads) of products 81.5 2,029,372 85.0 1,730,110 117.3 sold Cost of goods for resale and 6.7 168,081 3.3 66,616 252.3 materials sold General and administrative 5.0 125,042 4.9 98,976 126.3 expenses Selling costs 6.8 168,851 6.9 139,642 120.9

7 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Key assets

Jun 30 2011 Jun 30 2010 2/4 Assets (PLN ‘000) Structure Structure change Value Value (%) (%) (%) 1 2 3 4 5 6 Non-current assets, including: 1,498,779 63.4 1,226,243 60.1 122.2 Property, plant and 1,218,509 51.6 1,136,051 55.7 107.3 equipment Current assets, including: 863,563 36.6 813,218 39.9 106.2 Inventories 306,109 13.0 290,998 14.3 105.2 Trade and other receivables 477,608 20.2 427,232 20.9 111.8 Cash and cash equivalents 75,045 3.2 94,952 4.7 79.0 Total assets 2,362,342 100.0 2,039,461 100.0 115.8

The value of the Company’s non-current assets, which accounted for 63.4% of total assets, increased from the level reported at the end of the previous financial year by 22.2% (PLN 272.54m), chiefly as a result of investment projects implemented by the Company. Current assets rose by 6.2% (or PLN 50.35m) relative to June 30th 2010, due to an increase in trade and other receivables (by PLN 50.35m) and in inventories (by PLN 15.11m), which went hand in hand with a decrease in cash and cash equivalents (by PLN 19.91m).

Jun 30 2011 Jun 30 2010 2/4 Past due receivables Value Value % share % share change (%) (PLN '000) (PLN '000) 1 2 3 4 5 6 Past due receivables: 38,487 100.0 39,443 100 97.6 Up to 3 months past due 16,280 42.3 16,420 41.6 99.1 From 3 to 6 months past due 576 1.5 1,720 4.4 33.5 From 6 to 12 months past due 1,041 2.7 1,376 3.5 75.7 More than 12 months past 20,590 53.5 19,927 50.5 103.3 due

Disputed receivables 279 0.7 0 0 x Total receivables, gross 609,146 100.0 483,146 100 126.1

Key items of equity and liabilities

Jun 30 2011 Jun 30 2010 2/4 PLN '000 Structure Structure change Value Value (%) (%) (%) 1 2 3 4 5 6=2/4 Equity 1,851,957 78.4 1,645,004 80.7 112.6 External capital, including: 510,409 21.6 394,457 19.3 129.4 Non-current liabilities 110,328 4.7 110,660 5.4 99.7 Current liabilities 400,057 16.9 283,797 13.9 141.0 Total equity and liabilities 2,362,342 100.0 2,039,461 100 115.8

Under the General Shareholders Meeting’s resolution concerning distribution of profit for the financial year 2010/2011, the Company paid out dividend in the total amount of PLN 19.12m and bonuses for employees in

8 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011 the total amount of PLN 6.72m. As at the end of financial year 2010/2011, the share of equity in the financing of the Company's assets stayed at a stable and high level of 78.4%. External capital increased principally due to higher current liabilities. As at June 30th 2011, current liabilities represented 78.4% of the external capital. The Company periodically used short-term loans and borrowings.

Jun 30 2011 Jun 30 2010 Change PLN '000 Structure Structure Value Value (%) (%) (%) 1 2 3 4 5 6=2/4 Total liabilities 510,385 100.0 394,457 100 129.4 Current liabilities, 400,057 78.4 283,797 71.9 141.0 including: loans and borrowings 822 0.2 437 0.1 188.1 trade and other payables 350,711 68.7 261,766 66.4 134.0 other 48,524 9.5 21,594 5.5 224.7 Non-current liabilities, 110,328 21.6 110,660 28.1 99.7 including: loans and borrowings 1,428 0.3 300 0.1 476.0 other 108,900 21.3 110,360 28.0 98.7 Past due liabilities, 900 0.2 144 0.04 625.0 including: to the state budget 0 - 0 - -

In the financial year 2010/2011, profitability ratios were positive and higher than in the previous financial year. Due to investment activities, liquidity ratios decreased, but remained at safe levels.

Jul 1 2010 Jul 1 2009 Change Ratio/formula – Jun 30 2011 – Jun 30 2010 (%) 1 2 3 4=2/3 Profitability ratios (%) Net margin 8.0 1.7 463.4 (net profit (loss)/ sales revenue) ROE 12.2 2.2 565.1 (net profit (loss)/ equity) ROA 9.6 1.7 549.2 (net profit (loss)/ total assets) Liquidity ratios Current ratio (current assets/ current 2.16 2.87 75.3 liabilities) Quick ratio ((current assets – 1.39 1.84 75.7 inventories) / current liabilities)

3.2. Trading policy and sales

Market position

Mineral fertilisers

In the financial year 2010/2011, the Company consolidated its leading position among the Polish producers and suppliers of fertilizers for the domestic agricultural sector. According to the Company's data, its annual nitrogen fertiliser production capacities amounted to 1.25m tonnes of nitrogen, ranking it second in the EU27.

9 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Mineral fertiliser production capacities in 2010 according to Fertilizer Europe's data:

Nitrogen fertilisers Compound fertilisers [million tonnes of ] [million tonnes of N] The Company 1.250 0.057 Poland 2.188 0.175 EU27 15.500 2.500 Global 156.000 17.000

Melamine

With its annual production capacity of 96,4 thousand tonnes, the Company ranks third globally among producers of melamine. Compared to its peers, ZA Puławy is distinguished by excellent internal integration of production activities and external integration of market operations. Based on the experience gained over more than 30 years of presence in the chemical industry, the Company has developed unique expertise which is key to its success in this field. The Company’s key advantages include location of the plant in the part of Europe characterised by rapidly growing consumption and proximity to the largest melamine market (i.e. Western Europe).

Company’s production capacity 96 thousand tonnes per year Global production capacity 1,877 thousand tones per year Global consumption 1,264 thousand tonnes per year

European production capacity 489 thousand tonnes per year

European consumption 404 thousand tones per year Source: ZA Puławy.

Caprolactam

The Company’s annual production capacity for caprolactam amounts to 70 thousand tonnes, which is higher than in 2010, and caprolactam manufactured in Puławy is perceived as a product of the highest quality. It should also be noted that ZA Puławy is able to flake (convert from liquid state into solid state) 100% of its caprolactam production, which enables it to concentrate sales on the rapidly developing Far East markets.

Company’s production capacity 70 thousand tonnes per year European production capacity 1,884 thousand tonnes per year Global production capacity 4,705 thousand tonnes per year Global consumption 4,143 thousand tonnes per year Polish production capacity 160 thousand tonnes per year Source: ZA Puławy.

Hydrogen peroxide

ZA Puławy is the sole producer of hydrogen peroxide in Poland. The Company has a well developed logistics system and its own means of transport, as well as a stable portfolio of long-term partners.

(measured as 100% solution equivalent) Company’s production capacity 10 thousand tonnes per year Global production capacity 3,000 thousand tonnes per year Global consumption 2,800 thousand tonnes per year European production capacity 1,100 thousand tonnes per year Source: ZA Puławy.

10 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Sales policy

Fertiliser market

The Company's sales policy, supported by an analysis of economic and market factors, is focused on an optimisation of sales in the existing market environment, with full reliance on the flexible production model. The Company's sales strategy with respect to fertilisers is aimed at achieving a stable, long-term development of the business relationships with partners who offer to the Company a safe level of sales of its fertiliser product mix throughout the year, despite the fact that the season of the highest consumption of fertilisers concentrates over a relatively short period from February to April. Fertiliser sales in the domestic market are based chiefly on an indirect form of distribution, i.e. cooperation with a number of selected strategic partners – distributors. Such partners include companies with long- standing experience, offering comprehensive services to farmers, often specialising in trading in means of agricultural production and in purchase of agricultural produce. The Company's products are sold under long- term partnership agreements and annual sales contracts. ZA Puławy’s export sales of fertilisers are handled by professional international fertiliser traders, under long-term and one-year contracts, or, increasingly, are made directly to end customers (UAN, a liquid fertiliser, being a case in point).

Melamine

The Company has continued its efforts to strengthen its business relations by modifying and extending its offering to include a mix of melamine and urea products. Acting on the basis of long-term contracts and strategic B2B partnerships, the Company offers to its partners security of supplies, understood at the same time as a long-term guarantee of sales of ZA Puławy's products. Negotiations with new large customers for melamine in Europe continue. The Company is currently selling 80% of its production volume under long-term contracts. ZA Puławy is a member of the European Melamine Producers Association (EMPA, at the European Chemical Industry Council (CEFIC) in Brussels), initiator of the anti-dumping proceedings concerning melamine from China which were successfully completed during the financial year under analysis, and of the European Panel Federation (EPF, Brussels), which groups producers of wood-based boards (melamine buyers). In 2010/2011, demand for melamine remained stable; over the first three quarters of the financial year, its prices were growing steadily, due to – among other factors – limited availability of the product. In the last quarter of the year, melamine prices fell by approximately 15% following a periodic inflow of the product from other markets to Europe.

Caprolactam

Caprolactam was sold to end customers who use it mainly in the production of polyamides, as well as to trading companies with which the Company has long-standing business relationships. In the analysed period, caprolactam was sold in Europe and in the Asian market (China, Taiwan, India and Korea). In order to minimise the potential risk related to possible imposition of anti-dumping duties as part of the anti-dumping process initiated by China on April 22nd 2010 with respect to caprolactam originating from the European Union and the USA, the Company successfully implemented a project to diversify caprolactam sales in the Asian markets, consolidating its position in Taiwan and expanding its trading activities into Thailand and Indonesia. ZA Puławy traded with its key customers under strategic one- or two-year contracts. The Company fully discharged its contractual obligations. In the period under analysis, especially in the second half of the financial year, there was a rise in the prices of raw materials used in the production of caprolactam (crude oil, benzene), which, combined with the continued undersupply of caprolactam in Asia and strong demand for the product, drove up its prices. Other factors which contributed to rising prices of caprolactam in the Far East included high prices of its substitutes, such as cotton and polyester, and the Chinese government's restrictive policies with respect to imports of the PA-6 polyamide (a product of caprolactam processing). In January 2011, the price of caprolactam in the Asian market hit its historical high having exceeded 3,000 USD/t, and continued to grow to 3,600 USD/t in April 2011. The anti-dumping proceedings conducted by the government of China against EU and US producers had no effect on the buyers' behaviour and their readiness to accept historically high prices. The anti-dumping proceedings have been declared to be completed in October 2011.

11 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

To note, the continuing permanent undersupply of caprolactam in China, due to its insufficient production in the country, results in the necessity for the Chinese to import the product. In 2009 caprolactam imports into China amounted to 600 thousand tonnes, in 2010 – 630 thousand tonnes, and is estimated to reach 650 thousand tonnes in 2011, whereas China's local production capacity was 525 thousand tonnes and 585 thousand tonnes respectively in 2009 and 2010, and is anticipated at 595 thousand tonnes in 2011.

AdBlue®

For ZA Puławy's high purity urea solution sold under a registered trademark AdBlue®, the financial year 2010/2011 was another period of dynamic growth and consolidation of leading position in the domestic and neighbouring markets. The product is sold directly to the customer or through a limited number of specialised distributors on the basis of annual and long-term contracts. The Company has specialised road vehicles to transport the solution. The market of AdBlue® is determined by EU laws relating to reduction of exhaust emissions and increasingly restrictive EURO standards (the EUR V currently in effect and the EUR VI to apply starting from 2013), which will stimulate a growing consumption of AdBlue®. Starting from January 2011, in line with the guidelines of the EUR Stage IIIB standard, reduction of nitrogen oxide emissions has also applied to “off - road” machines, such as tractors, inland and sea vessels, locomotives or construction machinery. The group of AdBlue® consumers has been gradually growing as new passenger cars equipped with the SCR system fuelled by AdBlue® enter the market. It is estimated that in 2012 consumption of the product in Poland will approximate to 120 thousand tonnes. The rate of growth of the European market, which reached 1.17m tonnes in 2010, is estimated at 2.5m tonnes per year.

Hydrogen peroxide

Hydrogen peroxide was sold mainly under one-year and quarterly contracts. As far as this product is concerned, the Company has a dozen or so years of production and market experience. Hydrogen peroxide was sold using a fleet of specialised road and rail tankers. The Company is the only producer of hydrogen peroxide in Eastern Europe. The nearest competitive facilities are located approximately 650 kilometres from Puławy, which – bearing in mind the considerable costs of logistics – gives the Company a competitive advantage in the region. Starting from the third quarter of the 2010/2011 financial year, hydrogen peroxide market has been showing signs of recovery. Reduction of hydrogen peroxide production capacities in Europe (by approximately 10%), which started during the crisis in 2009, combined with an increased demand for the product generated in the industries in which it is used (the paper, textile and chemical industries), resulted in growing prices of the product in the second half of the year. Higher than expected demand from the pulp and paper industry was the main driver of hydrogen peroxide prices in 2010. Demand from pulp and paper manufacturers is expected to remain strong until the end of 2011.

Customer relations

In the 2010/2011 financial year, the Company's activities in the area of customer relations focused on building partnership and lasting business solutions. The Company attaches great importance to the role played by the communication of knowledge on its products through self-published industry magazines, including “BiuletynN”, addressed to the fertilizer and agricultural markets, and “Aktualności AdBlue®”, dedicated to the AdBlue® and other urea solutions market. Building of strong customer relations is supported through the organisation of conferences and meetings, where joint market activities in the chemicals and fertilizer segments can be recapitulated. As part of its marketing activities, the Company was involved in programmes aimed at promoting the latest agricultural knowledge. “Chemistry in agriculture” was one of such programmes. It was targeted at students from primary schools located in rural areas, demonstrating an extraordinary artistic talent. The best works awarded in the contest are featured in an annual calendar published by the Company, which is later distributed among our business partners. Another project implemented by the Company as part of supporting the development of rural areas was the “Puławy Distribution Leader” programme. It was targeted at small, country schools, and consisted in providing children from low-income families with school kits. This programme was implemented with an active participation of government institutions. Invariably, the Company’s representatives are actively involved in projects undertaken by the Ministry of State Treasury, the Ministry of Economy or the Ministry of Environmental Protection. 12 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

In any of such initiatives the Company sought to support such solutions with respect to its direct involvement, issuing opinions on projects or providing expert advice which directly or indirectly improve the Company’s operating environment. All of such activities allow ZA Puławy to actively create its image.

Fertiliser market

The Company’s cooperation with its customers is based on establishing and developing lasting business relations based on partnership, mutual trust, loyalty and business ethics. That is the objective fostered by all the activities undertaken to date by the Company, including:  meetings with the Company’s domestic sales partners;  active participation in debates concerning the agricultural sector, as well as current and future operating conditions of the fertilizer industry in Poland and the EU;  implementation of the Product Stewardship Programme, undertaken by the Company as a member of Fertilizers Europe (European Fertilizer Manufacturers Association);  preparation and distribution of promotional and educational materials for customers, as well as provision of advice concerning storage and handling of the Company's fertilizer products;  organisation, together with the Puławy Institute of Soil Science and Plant Cultivation, of a series of meetings and training courses focused on promoting the use of the UAN-RSM® liquid fertilizer;  participation in conferences, seminars, trade fairs and exhibitions, in Poland and abroad, as a member of various trade organisations;  an international research project involving the use of nitrogen fertilizers containing sulphur.

Chemicals market

Cooperation between the Company and its business partners is founded principally on building a relationship of trust, which would lead to long-term business contracts, ensuring the most efficient and stable sales. The Company's trade force holds regular meetings with the sales partners, including meetings designed to emphasise the special attention given to ZA Puławy's strategic partners. The congress held in Kazimierz Dolny in November 2010 under the motto “Feel the Chemistry” was one of such events. Employees of ZA Puławy are members of numerous industry organizations and participate in conferences and seminars. This provides an important platform for expanding our expertise and promoting the Company, and gives us the opportunity to form the business environment in which we work.

ZA Puławy's relations with producer associations and industry organisations

ZA Puławy is a member of key industry organisations (EFMA, EPCA, EMPA, IFA, NPG-6, EPF and CEFIC). In June 2011, at the General Assembly of Fertilizers Europe, the President of the Management Board of ZA Puławy was elected to serve as Vice-President of the organisation and Chairman of the Trade and Economic Policy Committee (TEPC). Membership in international organisations provides an important platform for expanding our expertise and promoting the Company, as well as supporting initiatives related to international trade regulations (e.g. initiation of anti-dumping proceedings).

13 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Sales In the financial year 2010/2011, the Company's sales revenue was PLN 2,863m, up by 39.7% on 2009/2010. The Company recorded sales growth across all its operating segments. Fertilisers were sold primarily on the domestic market, which accounted for 71% of the total sales. For chemical products, the principal sales market was Asia.

3.3. Supply of strategic resources Natural gas

In the financial year 2010/2011, the average gas price paid by the Company was approximately 9.7 USD/MMBtu. The latest forecast by IHS CERA suggests that in 2011/2012 the gap between spot and contract prices will close as the gas market becomes tighter (end of recession, growing demand). In the financial year 2011/2012, the average contract gas price is expected to increase by 18% compared with 2010/2011, to approximately 11.36 USD/MMBtu. Spot prices will be growing much faster, as a result of rising demand for natural gas in Asia, especially in Japan. In the financial year 2011/2012, the average spot gas price in Western Europe is expected to go up by 27% compared with 2010/2011, to 11.32 USD/MMBtu.

In the period July 1st 2010–June 30th 2011, the rates applicable to gas purchases by ZA Puławy were those approved by virtue of the following decisions of the President of the Energy Regulatory Office (the “URE”): 1. From July 1st 2010 to September 30th 2010 – PGNiG S.A.'s Gaseous Fuel Tariff, Part A: Gaseous Fuel Supply Tariff No. 3/2009, approved by virtue of the President of URE's decision No. DTA-4212- 10(14)/2010/652/III/AG of May 17th 2010. 2. From October 1st 2010 to December 31st 2010 – PGNiG S.A.'s Revised Gaseous Fuel Tariff, approved by virtue of the President of URE's decision No. DTA-4212-30(9)2010/652/III/AG of September 16th 2010. 3. From January 1st 2011 to June 30th 2011 – PGNiG S.A.'s Revised Gaseous Fuel Tariff, Part A: Gaseous Fuel Supply Tariff No. 3/2010, approved by virtue of the President of URE's decision No. DTA-4212- 53(8)/2010/652/III/AG of December 16th 2010.

PGNiG S.A.'s Revised Gaseous Fuel Tariff, Part A: Gaseous Fuel Supply Tariff No. 3/2010, will be effective until July 14th 2011. In the following period, i.e. from July 15th 2011 to December 31st 2011, a Revised Tariff approved by virtue of the President of URE's decision No. DTA-4212-12(11)/2011/652/IV/AG of June 30th 2011 will apply to the Company. Taking into account transmission costs, and assuming that actual consumption equals the contracted capacity, the tariff revision will result in the Company paying 11.1% more for its gaseous fuel. Gaseous Fuel Supply Tariff No. 4/2011 was approved to be effective until December 31st 2011. On March 3rd 2010, an annex was signed to the agreement on purchase of high-methane natural gas, entered into with PGNiG S.A. on January 14th 1999 for an indefinite term. The agreement provides for the sale and supply of specific volumes of natural gas by PGNiG S.A. Under the annex, the volumes of gaseous fuel and contracted capacity are to be increased relative to the previous years, as required in connection with the launch of new production capacities by the Company. In 2011, the value of the agreement is estimated at PLN 990m (VAT exclusive), which is more than 10% of the Company's equity (significant agreement).

Power coal

In the financial year 2010/2011, China continued to strengthen its position as a major player on the coal market. The demand generated by this powerful Far-Eastern state became the key driver of coal prices on the international markets. The average CIF ARA (6,000 Kcal) coal price ranged from 92 USD/t in Q1 to approximately 128 USD/t in Q4 2010/2011. Over the 2011/2012 financial year, prices are expected to drop slightly, to 122 USD/t. On February 4th 2011, the Company signed a long-term power coal purchase agreement with Kompania Węglowa S.A. The agreement provides for the sale of power coal to ZA Puławy and expires on December 31st 2013. In the first year of the agreement, the prices set forth therein will apply to the individual quality grades of coal determined on the basis of its calorific value and sulphur content. The prices in the second and third year will be equal to the previous year's prices adjusted by an index calculated using data on price changes published by the Polish Central Statistics Office.

14 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

The estimated value of the agreement with respect to the basic contracted volume will fall in the range from PLN 157m to PLN 173m, depending on the coal quality. The upper limit of the estimated value range exceeds 10% of the Company’s equity. In the reporting period, Kompania Węglowa S.A. and Lubelski Węgiel Bogdanka S.A. were the key suppliers of power coal to ZA Puławy. In H1 2010/2011, contract prices of domestically produced coal remained flat relative to H2 2009/2010. As of January 2011, new prices apply, agreed with the suppliers for 2011. Russian low-sulphur coal was purchased regularly as needed, at agreed-upon prices and pursuant to executed contracts. The final price of coal supplied depended on its net calorific value and sulphur content.

Electricity

In the period from July to December 2010, the Company was bound by the Agreement on the Sale of Electricity and Provision of Electricity Transmission Services, concluded with PGE Lubelskie Zakłady Energetyczne S.A. (in the part related to the purchase of electricity), together with the applicable Annexes thereto. The Company continued to pay the rates and transmission charges which became effective as of January 2010 with respect to annual contracted capacity. On August 30th 2010, ZA Puławy gave notice to terminate the agreement with PGE Lubelskie Zakłady Energetyczne S.A. of December 20th 1999 (in the part related to the purchase of electricity). The agreement was terminated as of December 31st 2010.

Starting from January 1st 2011, ZA Puławy has diversified its electricity purchases. Electricity is purchased under one-year, short-term and spot contracts. The Company is also bound by the Transmission Agreement and the Agreement for the Provision of Commercial Operator/Entity Responsible for Commercial Balancing Services. This way, the Company is an active participant in the power market. The electricity prices, transmission charges and subscription fee are specified in the Electricity Tariff of PSE- Operator S.A., approved by the President of the Energy Regulatory Office as applicable from January 1st 2011. The final price of electricity for ZA Puławy depended on the differences between the planned purchase volumes and the actual consumption, and the related cost of any deviations.

Benzene

In 2010/2011, the benzene market was highly volatile. Benzene prices were affected primarily by high prices of hydrocarbons, including crude oil and kerosene, and strong market demand. In Europe, the benzene contract price fell to its lowest level of 873 USD/t in July 2010, and peaked at 1,378 USD/t in March 2011. At the end of the reporting period, the price settled at 1,190 USD/t. According to market experts, over the coming few months this downward trend is likely to continue.

Phosphorites

In Q1 2010/2011, the prices of phosphorites remained flat and then started to increase. From October to December, prices of phosphorites on the Tunisian and Syrian markets went up by 9–15%, whereas in Morocco they remained flat relative to the previous quarter. In Q4, contract prices of Moroccan phosphorites paid by American and European buyers were around 175–195 USD/mt FOB.

Sylvinite

At the start of the financial year, sylvinite prices were stable. In Q2, a 7% increase in the benchmark was recorded, and the prices continued to grow in Q3 and Q4. Throughout the reporting period, the sylvinite prices went up by 42%.

3.4. Production

In the financial year 2010/2011, the output of the Company’s plants was adjusted to market demand. In comparison with 2009/2010, the output of:  nitrogen fertilisers (calculated on a pure-nitrogen basis) rose by 7.0%,

15 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

 caprolactam rose by 8.1%,  melamine fell by 3.8%,  hydrogen peroxide fell by 2.0%,  AdBlue® rose by 0.2%.

3.5. Segment discussion and analysis The Company's operations are broken down into the following segments: Agro Segment, Chemical Segment, Energy Segment and Other Operations.

Company's revenue from sales to external customers by Segments:

Revenue [PLN '000] Change Item Jul 1 2010 Jul 1 2009 (2-3)/3=4) – Jun 30 2011 – Jun 30 2010 1 2 3 4 AGRO 1,521,511 1,060,944 43.4% CHEMICAL 1,184,718 944,825 25.4% ENERGY 80,945 36,489 121.8% OTHER OPERATIONS 75,768 6,840 1,007.8% Foreign exchange differences (40,253) 6,805 -691.6% GROUP TOTAL 2,822,689 2,055,903 37.3%

Share of exports in the Segments' external revenue:

Share of exports (%) Item Jul 1 2010 Jul 1 2009 – Jun 30 2011 – Jun 30 2010 AGRO 29.6% 23.0% CHEMICAL 74.7% 75.0% ENERGY 0.0% 0.0% OTHER OPERATIONS 88.7% 0.0% TOTAL SEGMENTS 49.0% 46.5% THE GROUP 48.3% 46.7%

Both in the financial year 2010/2011 and 2009/2010, the Agro Segment's revenue accounted for the largest share (53.9%) of the Company's sales revenue. In 2010/2011, the Agro Segment recorded PLN 1,521.51m in sales revenue, up by 43.4% year on year. Sales revenue of the Chemical Segment, the second largest in terms of the sales figure, was PLN 1,184.71m, which represents a year-on-year increase of 25.4%. The Chemical Segment's share in the Company's total sales revenue fell from 46.0% in 2009/2010 to 42.0% in 2010/2011. In the reporting period, the Company recorded also a substantial increase in revenue generated by the Energy Segment, of 121.8%. This increase is attributable to sales of electricity and energy carriers to a new large external customer, which conducts its operations on the premises of ZA Puławy and supplies oxygen and nitrogen to the Company. The revenue increase in the Other Operations Segment is attributable to sales of ERUs.

16 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Agro Segment

The main commercial products in the Argo Segment are nitrogen fertilisers: ammonium nitrate, urea, UAN- RSM®, and ammonium sulphate. Other commercial products of the Agro Segment include ammonia water, ammonia, hydrogen, nitric acid, liquid nitrogen, instrument air, magnesium nitrate, carbon dioxide and dry ice. The Agro Segment also sells goods for resale (mainly fertilisers) and materials (e.g., catalytic gauzes from the segment's installations), as well as services.

Agro Segment's revenue from sales to external customers by products:

Structure (%) Item Jul 1 2010 Jul 1 2009 – Jun 30 2011 – Jun 30 2010 Main commercial products 91.6% 93.0% Other commercial products 3.2% 2.2% Segment's other revenue 5.2% 4.8% Total: 100.0% 100.0%

Share of exports in the Agro Segment's external revenue:

Share of exports (%) Item Jul 1 2010 Jul 1 2009 – Jun 30 2011 – Jun 30 2010 Main commercial products 29.3% 22.3% Other commercial products 35.7% 12.0% Segment's other revenue 31.3% 40.7% Segment's total revenue 29.6% 23.0%

In the financial year 2010/2011, the Agro Segment posted an operating profit including inter-segment sales of PLN 296.93m, up by 235.7% relative to 2009/2010. Year on year, the Agro Segment's sales volumes increased across all the product categories, including:  main products - up by 8.6%,  hydrogen - up by 26.0%,  other products - up by 35.7%,  goods for resale - up by 148.5%. In the financial year 2010/2011, the Agro Segment's revenue from sales to external customers was PLN 1,521.51m, up by 43.4% on the figure posted in the previous year, while cost of sales increased by 17.4% and selling costs – by 27.0%. In the financial year 2010/2011, the Agro Segment recorded PLN 450.58m in export revenue, up by 84.7% year on year. In 2010/2011, the share of exports in the Agro Segment’s total revenue from sales to external customers stood at 29.6%, compared with 23.0% a year earlier. The larger share of export revenue was mainly attributable to higher revenue from sales of UAN–RSM®.

Due to implementation of the investment project designed to increase the production capacity of the urea production plant by approximately 25% (in the Chemical Segment) and the need to build its connections to other units, in the period from June to October 2010 the Company did not produce granulated urea. Still, sales of the fertiliser proceeded in line with the contracted obligations: the Company sold the product acquired from external sources. September 2010 saw the launch of the oxygen unit at Air Liquide Polska Sp. z o.o. and the Company started purchasing oxygen from external sources. As a result, all of the Company's own oxygen units were shut down. At present, all of the Company's installations which use oxygen (Ammonia Plant I, Caprolactam Plant, Ammonia

17 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Plant II) are supplied with oxygen produced by an external source. ZA Puławy cooperates with Air Liquide Polska Sp. z o.o. under a 15-year sales contract of June 17th 2008 (Current Report No. 27/2008). The production capacity of the new oxygen generation unit exceeds the capacities previously available at the Company and fully covers ZA Puławy's increased demand for oxygen, attributable primarily to approximately 25% higher urea production capacities following the upgrade.

Chemical Segment

The main products in the Chemical Segment include melamine, caprolactam, hydrogen peroxide, urea and AdBlue®. Other products of the Chemical Segment include cyclohexanone, cyclohexane and alcohol forerunnings. The Chemical Segment also sells goods for resale (mainly chemicals) and materials (e.g. catalytic gauzes), as well as services.

Chemical Segment's revenue from sales to external customers by products:

Structure (%) Item Jul 1 2010 Jul 1 2009 – Jun 30 2011 – Jun 30 2010 Main commercial products 97.6% 98.3% Other commercial products 0.1% 0.4% Segment's other revenue 2.4% 1.4% Total: 100.0% 100.0%

Share of exports in the Chemical Segment's external revenue:

Share of exports (%) Item Jul 1 2010 Jul 1 2009 – Jun 30 2011 – Jun 30 2010 Main commercial products 76.1% 75.6% Other commercial products 0.0% 75.6% Segment's other revenue 20.4% 31.2% Segment's total revenue 74.7% 75.0%

In the financial year 2010/2011, the Chemical Segment recorded PLN 142.40m in operating profit, whereas in 2009/2010 it posted a loss of PLN (-)50.16m. In 2010/2011, revenue from sales of chemical products to external customers amounted to PLN 1,184.72m, up by 25.4% year on year. Cost of sales to external customers rose by 5.6% and selling costs increased by 4.3% relative to 2009/2010. The sales revenue increase was achieved despite lower volumes of products sold (down by 10.5% year on year in the case of main products and by 45.3% in the case of other products). In the financial year 2010/2011, the Chemical Segment recorded export sales revenue of PLN 885.50m, up by 25.0% year on year. Higher share of export sales is attributable primarily to higher revenue from export sales of caprolactam (up by 38.0% year on year). The share of exports in the Chemical Segment's total revenue from sales to external customers stood at 74.7%, compared with 75.0% a year earlier.

Energy Segment

The main commercial products in the Energy segment are electricity, heat and heat carrier. Other commercial products include other utilities. The Segment also sells property rights (certificates of origin for cogeneration electricity) and services.

18 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Energy Segment's revenue from sales to external customers by products:

Structure (%) Item Jul 1 2010 Jul 1 2009 – Jun 30 2011 – Jun 30 2010 Main commercial products 87.3% 66.1% Other commercial products 1.7% 2.2% Segment's other revenue 11.0% 31.6% Total: 100.0% 100.0%

The Energy Segment sells its products exclusively on the domestic market. In 2010/2011, the Energy Segment's operating profit including inter-segment sales was PLN 60.41m, compared with PLN 83.05m posted in 2009/2010. The operating profit declined primarily due to lower prices. In 2010/2011, the Energy Segment's revenue from sales to external customers amounted to PLN 80.94m, up by 121.8% year on year, while cost of sales to external customers rose relative to 2009/2010 by 121.0%. The high growth dynamics of the Energy Segment's revenue from and cost of sales to external customers relative to the previous year is almost wholly attributable to nearly 20-fold larger volume of electricity sold to a new external customer, namely the oxygen generation plant launched in September 2010. In the financial year 2010/2011, internally produced electricity accounted for 41.4% of the total demand, compared with 40.6% a year earlier.

Other Operations

The main commercial products in the Other Operations Segment include plastic sacks, plastic film and rubbish bags. The Segment's other commercial products are materials and emission reduction units (ERUs). Any sales of services not classified in the Agro, Chemical or Energy segments are also disclosed in Other Operations.

In the financial year 2010/2011, the Other Operations Segment recorded a loss of PLN (-)5.85m, compared with a loss of PLN (-)2.03m in 2009/2010. In 2010/2011, revenue from sales of the Other Operations Segment's products to external customers was PLN 75.77m, up by 1,007.8% relative to 2009/2010. Cost of sales to external customers and selling costs expanded respectively by 895.6% and 170.6% year on year. The segment’s revenue from export sales amounted to PLN 67.21m in the financial year 2010/2011, relative to PLN 0.02m posted in 2009/2010. This increase was mostly attributable to export sales of ERUs (not recorded in the previous year). In 2010/2011, revenue from export sales represented 88.7% of the segment’s total sales to external customers, compared with 0.04% in the corresponding period of the previous year.

3.6. Financial policy and financial risk management

In response to the continuing uncertainty on the financial markets, the Company has adopted a conservative financial policy. The Company has credit lines of up to PLN 152m established with banks to ensure a reliable source of liquidity. As at June 30th 2011, the credit lines were not used by the Company.

19 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Loan agreements effective in the 2010/2011 financial year:

Agreement Credit execution Cost of credit No. Bank facility/ loan date/ Remarks facility/ loan amount repayment date Lublin Provincial Fund for Environmental preferential Protection and Water interest rate Aug 7 2007 1 PLN 70,000 Management, Loan (based on bill Dec 31 2011 Agreement No. rediscount rate) 12/2007/P/OP PLN 1M WIBOR + Sep 8 2009 PKO BP S.A., multi- 20,000,000 margin Jun 22 2011 2 purpose credit facility PLN 1M WIBOR + Jun 22 2011 80,000,000 margin Sep 6 2011 PLN 1M WIBOR + Dec 29 2009 Bank Zachodni WBK 20,000,000 margin May 24 2011 In the period from 3 S.A., overdraft facility July 1st 2010 to PLN 1M WIBOR + May 24 2011 agreement June 30th 2011, the 50,000,000 margin May 31 2012 Company used the Raiffeisen Bank Polska PLN 1W WIBOR + Aug 25 2010 4 funds available to it S.A. 5,000,000 margin Sep 30 2011 under the credit lines Raiffeisen Bank Polska PLN 1W WIBOR + Aug 25 2010 contracted with banks 5 S.A. 15,000,000 margin Dec 14 2011 to a small extent only. The facility incurs no cost. Any PEKAO S.A., PLN overdraft should be Oct 22 2010 6 intraday overdraft 2,000,000 repaid on the same Sep 30 2011 facility agreement day on which it occurs.

In the 2010/2011 financial year, the Company did not contract any loans/borrowings which would require approval:  under Art. 5a of the Act on the Rules Governing the Exercise by the State Treasury of its Rights, dated August 8th 1996 (Dz.U. of 1996, No. 106, item 493, as amended),  under Art. 393.3 of the Commercial Companies Code, dated September 15th 2000 (Dz. U. No. 94, item 1037, as amended).

Credit facility agreements

In the financial year 2010/2011, ZA Puławy entered into two additional loan agreements (with Raiffeisen Bank Polska S.A.) for a total amount of PLN 20m. Moreover, the Company renewed or extended the existing agreements with PKO BP S.A. and BZ WBK S.A., in each case raising the credit facility amount and securing better terms as regards the cost of the loan. The intraday overdraft facility agreement with PEKAO S.A. was also renewed.

Leases

In the financial year 2010/2011, three agreements for lease of movable property with a total value of PLN 1.09m were entered into with BRE Leasing Sp. z o.o. Furthermore, during the reporting period an annex was signed to the agreement for lease of a passenger car executed with BRE Leasing Sp. z o.o. in 2008. The annex provides for the return of the passenger car to the lessor and for early settlement of the agreement.

20 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Managing free cash

The financial policy pursued by the Company in the 2010/2011 financial year was designed to maintain its current financial liquidity through ongoing monitoring of cash flows. In line with the Company’s internal security rules and conservative approach to cash management, any surplus cash was invested in bank deposits. The investment risk was minimised through diversification of institutions with which the deposits were placed.

Cash placed on deposits, as at Jun 30 2011 PLN deposits PLN 49,140 thousand EUR deposits EUR 3,387 thousand USD deposits USD 1,640 thousand

On May 26th 2011, ZA Puławy signed:  Agreement on debt repayment terms with GZNF Fosfory Sp. z o.o. of Gdańsk (a PLN 78,956,471.23 loan);  Agreement on debt repayment terms with Agrochem Sp. z o.o. of Człuchów (a PLN 37,558,016.37 loan);  Agreement on debt repayment terms with Agrochem Sp. z o.o. of Dobre Miasto (a PLN 4,096,814.74 loan).

The Agreements settle the terms of loan repayment between the GZNF Fosfory Group and ZA Puławy S.A. based on new documents superseding the Subrogation Agreement. They provide for a detailed debt repayment schedule, interest rates and form of security to be created for the benefit of ZA Puławy S.A. The final repayment date for the loans has been set at September 28th 2012. The process relating to establishing security interests by the debtor companies for the benefit of ZA Puławy is under way.

Currency risk

The Company hedges its foreign exchange risk. Its hedging strategy is designed to mitigate any cash flow volatility resulting from fluctuations in foreign exchange rates, and in particular any negative divergence of cash flows from budgeted amounts, through natural hedging, i.e. the matching of revenues and expenses denominated in the same foreign currency. The remainder of the foreign currency exposure is hedged using currency forwards. The procedures in place at the Company permit forward transactions and zero-cost collars. The currency volumes and settlement dates of the options written and purchased as part of the zero-cost collar strategy must be identical. The applicable procedures also permit the purchase of put options. The volume of any such hedging transactions may not exceed 80% of the planned foreign currency exposure. In the reporting period the Company entered only into currency forwards. The transactions were not concluded for speculative purposes, but solely in order to hedge the risk of a decline in the value of the expected future currency exposure.

In the 2010/2011 financial year, a total of 187 hedging transactions were settled, producing a result of PLN (+) 20.91m (41% of the result being related to EUR transactions). The hedging transactions which were open as at June 30th 2011 were valued at PLN (+) 0.02m.

The effect of the hedging transactions on the net financial result for the financial year 2010/2011 was positive at PLN (+) 20.91m, which included: PLN (+) 20.91m on settled transactions, PLN (+) 0.02m on valuation of open transactions as at June 30th 2011, PLN (-) 0.02m on derecognition of valuation of transactions open as at June 30th 2011.

21 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Insurance agreements

On June 23rd 2010, the Company purchased an All-Risk Property Insurance Policy, effective in the period July 1st 2010–June 30th 2011, under the framework of the General Insurance Agreement covering the period July 1st 2010–June 30th 2012.

On October 18th 2010, the Company purchased an environmental pollution insurance policy, covering the period from December 1st 2010 to November 30th 2011. This insurance policy covers claims concerning the redress of any potential adverse environmental effects related to operation of a landfill site. The obligation to hold such an insurance policy arises from the Act Amending the Waste Act and Certain Other Acts, dated January 22nd 2010 (Dz. U. No. 28, item 145), which entered into force on March 11th 2010.

The Trade Credit Risk Insurance Policy with Receivables Collection Option, issued by TU Euler Hermes S.A. and effective from November 1st 2009, expired on October 31st 2010. On October 1st 2010, the insurance policy was extended until October 31st 2011. The insurance covers the Company’s receivables from domestic and international buyers of caprolactam and melamine, up to the value of the trade credit limits granted by TU Euler Hermes S.A. (excluding transactions covered by bank guarantees and letters of credit). Under the Trade Credit Risk Insurance Policy, the insurer is obliged to pay compensation to the Company, if the Company does not receive payments for the caprolactam and melamine it has sold as a result of a customer’s legally confirmed or practical insolvency.

As a result of debt collection and compensation proceedings against MEPA N.V., the Company recovered EUR 308,233.67 under the insurance policy.

On January 26th 2011, a Third Party Liability Insurance Policy for Management and Supervisory Staff was renewed for another period. Insurers: TUiR Allianz Polska S.A. and ACE European Group Ltd. Insurance period: February 1st 2011–January 31st 2012. The insurance coverage is provided to members of the Company’s Management and Supervisory Boards, its commercial proxies and designated employees during the performance of their management or supervisory duties. Insurance scope: third-party liability arising in connection with performance of management or supervisory functions.

On June 1st 2011, Annex 1 was signed to the Third Party Liability Insurance Policy for Management and Supervisory Staff, whereunder companies of the GZNF Group (i.e. GZNF Fosfory Sp. z o.o. and its subsidiaries: Agrochem Sp. z o.o. of Człuchów and Agrochem Sp. z o.o. of Dobre Miasto) were included in the policy taken out by ZA Puławy S.A. covering the period February 1st 2011–January 31st 2012. The insurance policy covers the GZNF Group companies in the period from May 24th 2011 to January 31st 2012.

Aid funds

On December 17th 2010, ZA Puławy's account was credited with an amount of PLN 2.79m, paid as a grant to co-finance the completed investment project “Alteration of the Unit for CO2 Removal from Gas in the Ammonia Synthesis Process – Replacement of 150K2 Absorber”.

In the financial year 2010/2011, the Company signed Grant Agreements under the Operational Programme Infrastructure and Environment to finance two projects:  Rationalisation of natural resources and waste management – priority axis 4.2 “Alteration of the Unit for CO2 Removal from Gas in the Ammonia Synthesis Process – Replacement of 150K2 Absorber (Line II)”. As provided for under the Grant Agreement, the value of the project was PLN 18,300,000 VAT-inclusive, and the grant amount was PLN 2.93m. The agreement with the National Fund for Environmental Protection and Water Management was signed on August 10th 2010. An annex to the Grant Agreement was executed on July 11th 2011, whereunder the grant amount was reduced to PLN 1.87m.  Air protection – priority axis 4.5 “Construction of NOx Emissions Abatement Unit for OP-215 Boilers No. 4 and No. 5 at ZA Puławy”. As provided for under the Grant Agreement, the value of the project was PLN 19.68m VAT-inclusive, and the grant amount was PLN 4.8m. The agreement with the National Fund for Environmental Protection and Water Management was signed on May 4th 2011. The total value of public aid approved in the financial year 2010/2011 was PLN 6.67m.

22 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

In the period July 1st 2010–June 30th 2011, the State Treasury assumed no obligations on behalf of the Company.

Operations in the Starachowice Special Economic Zone

On August 24th 2010, the Management Board of the Starachowice Special Economic Zone granted to ZA Puławy Permit No. 127/2010 to conduct business activity in the Starachowice Special Economic Zone. Under the permit, ZA Puławy intends to launch production of the PULASKA® liquid fertiliser based on urea and ammonium sulphate. The minimum qualifying capital expenditure to be spent in the Zone by March 31st 2013 is at least PLN 50m. In line with the permit requirements, ZA Puławy intends to increase its headcount in the Zone, which was 10 employees as at the permit date, by hiring 40 new staff by December 31st 2013, and to maintain a headcount of 50 employees until December 31st 2018.

On November 9th 2010, ZA Puławy made a notification of its intent to use the property tax relief, which is treated as a regional investment incentive. A relevant application to be granted a property tax relief under Resolution No. XXXVIII/360/09 of the Puławy Town Council, dated August 27th 2009, was submitted to the Mayor of Puławy in connection with the planned implementation of the project named “Production of Liquid Fertilisers Based on Urea and Ammonium Sulphate (PULASKA®)”. In January 2011, the project designed to enhance the production capacity of the urea production plant was put in operation. The plant upgrade was performed as part of a project named “Modernisation of the Oxygen Generation Plant – Ammonia – Urea Production Line” and implemented under the permit to conduct business activities in the Starachowice Special Economic Zone – the Puławy Subzone, granted to ZA Puławy in July 2008. On January 14th 2011, the Council of Ministers' Regulation amending the regulation on the Starachowice Special Economic Zone came into force. Under the amending Regulation, real property with a total area of 3.4737ha, held in perpetual usufruct by ZA Puławy, was incorporated into the Starachowice Special Economic Zone – the Puławy Subzone. The Regulation was published in the Journal of Laws (Dz.U.) No. 254, item 1703, of December 30th 2010. The incorporation of the new area into the Starachowice Special Economic Zone – the Puławy Subzone was offset by a simultaneous exclusion of a total area of 3.2152ha previously located within the borders of the zone. On January 24th 2011, ZA Puławy made a notification of its intent to use the property tax relief, which is treated as a regional investment incentive. A relevant application to be granted a property tax relief under Resolution No. XXXVIII/360/09 of the Puławy Town Council, dated August 27th 2009, was submitted to the Mayor of Puławy in connection with the planned implementation of the project named “Construction of Ammonia Storage and Distribution Facilities”. On March 7th 2011, the Management Board of the Starachowice Special Economic Zone granted ZA Puławy another permit to conduct business activity in the Starachowice Special Economic Zone – the Puławy Subzone. Under the permit, ZA Puławy intends to launch production of the PULGRAN®S solid fertiliser, based on urea and ammonium sulphate. The minimum qualifying capital expenditure to be made in the Zone by April 30th 2013 is at least PLN 68m. The minimum number of new employees to be engaged by June 30th 2015 in connection with the launch of new production is 35. On March 11th 2011, ZA Puławy made a notification of its intent to use the property tax relief, which is treated as a regional investment incentive. A relevant application to be granted a property tax relief under Resolution No. XXXVIII/360/09 of the Puławy Town Council, dated August 27th 2009, was submitted to the Mayor of Puławy in connection with the planned implementation of the project named “Production of Solid Fertilisers Based on Urea and Ammonium Sulphate (PULGRAN®S)”.

23 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Surety issued by the Company

The surety issued by the Company to secure the repayment of an investment loan (Loan Agreement No. 18/011/03/D/IN of March 10th 2003, as amended) contracted by BBM Sp. z o.o. with BRE Bank S.A., has been in effect since March 10th 2003. Pursuant to the Agreement, each year ZA Puławy may reduce the maximum amount of the surety by an amount corresponding to the principal repayments made during the year by BBM Sp. z o.o. The surety remains in effect until December 30th 2017. In view of timely repayments of the investment loan by Bałtycka Baza Masowa Sp. z o.o., pursuant to the Notarial Deed of December 23rd 2005, Annex No. 6 to the Surety Agreement was signed on January 20th 2011, reducing the amount of the surety issuer’s liability towards the bank from USD 3,230,000 to USD 2,730,000. Security created by Bałtycka Baza Masowa Sp. z o.o. for the Company’s benefit in respect of the surety includes a blank promissory note and a representation on submission to enforcement. Security created by the Company for the benefit of BRE Bank S.A. in respect of the loan includes a pledge over the shares in Bałtycka Baza Masowa Sp. z o.o. and a power of attorney over the Company’s bank accounts held with BRE Bank S.A.

Entity in Entity to respect of whose whose Surety amount as Intended use of Date of surety benefit the Term of surety liabilities at Jun 30 2011 surety amount surety was the surety issued was issued Notarial Deed Rep. A Bałtycka Bank security in No. 6618/2005 of Baza Rozwoju USD 2,730,000 respect of a Dec 30 2017 December 23rd 2005, Masowa Eksportu foreign currency Annex 1 of February Sp. z o.o. S.A. of investment loan 17th 2006 , Annex 2 of , contracted to January 17th 2007, Gdańsk finance an Annex 3 of January Branch investment 22nd 2008, Annex 4 of project named February 23rd 2009, “Construction of Annex 5 of January a Liquid and 19th 2010, Annex 6 of Loose Fertiliser January 20th 2011 Terminal at the Port of Gdynia”

The total value of sureties issued by ZA Puławy does not exceed 10% of the Company’s equity.

3.7. Non-current assets

The Company conducts its operations using non-current assets with a net value of PLN 1,498.78m (as at June 30th 2011). 81.3% of these non-current assets is property, plant and equipment.

The table below shows changes in the value of the Company’s property, plant and equipment.

Property, plant and equipment Jul 1 2010 Jul 1 2009 Change (PLN ‘000) –Jun 30 2011 –Jun 30 2010 (%) 1 2 3 4=2/3 At beginning of period 821,670 754,054 109.0 Increases 347,763 147,535 235.7 Depreciation (80,465) (66,284) 121.4 Other changes (50,463) (13,635) 370.1 Net value at end of period 1,038,505 821,670 126.4

24 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Assets in the form of buildings, structures, plant and equipment are located on land with the total area of 768.17 ha (as at June 30th 2011).

Land within the enclosed grounds, including: 321.5057 ha - land used for production purposes 110.3723 ha - land occupied by roads 91.1550 ha - land intended for development or leased by third- 119.9784 ha party companies Land outside the enclosed grounds 446.6643 ha Legal status of land land held by the Company in perpetual usufruct 644.3194 ha land whose legal status is unclear*, including: 123.8506 ha - land in respect of which legal proceedings are 78.1894 ha pending - other land 45.6612 ha *The land whose legal status is unclear, owned by the State Treasury, is – according to the land registry records – held “under permanent administration” by ZA Puławy; this land is situated outside the enclosed grounds, some of it is used by the Company, while the rest is useless for the Company’s operations.

As at June 30th 2011, the Company was party to a number of agreements with tenants and lessees of the Company’s assets, including 41 tenancy agreements with 38 business entities, 27 lease agreements with 24 business entities, and 2 agreements on participation in the costs of maintenance of the Company’s roads. The lease and tenancy agreements concerned land, buildings, structures, rooms and other premises. The income from monthly lease payments amounted to some PLN 410 thousand.

3.8. Investment projects

In the financial year 2010/2011, 45 investment projects related to construction and modernisation of property, plant and equipment were completed and placed in operation (including milestone acceptances in two cases). In the corresponding period of the financial year 2009/2010, 45 investment projects were placed in operation (including milestone acceptances in four cases). The projects related to replacement and modernisation of equipment which is of key importance to improving the quality of the Company’s products and enhancing the operational reliability of production and maintenance units, as well as for environmental protection, improvement of working conditions and customer service. In 2010/2011, expenditure on construction and modernisation of property, plant and equipment amounted to PLN 304.04 mln and was 13.8% lower than a year earlier.

Sources of financing

Jul 1 2010 Jul 1 2009 Change PLN '000 –Jun 30 2011 –Jun 30 2010 (%) 1 2 3 4=2/3 Capital 304,035 352,635 86.2 expenditure Sources of financing own funds 267,981 319,082 84.0 grants 2,803 9,009 31.1 liabilities 33,251 24,544 135.5

Below are described the major investment projects which were completed or under way in the financial year 2010/2011:

25 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Expansion of production capacity  Modernisation of the Oxygen Generation Plant – ammonia – urea production line – intensification of production of ammonia and urea;  Modernisation of the Coupling Station – increasing the station's production capacity.

Efficiency improvements  Intensification and Modernisation of the Caprolactam Solidification Process – intensification of caprolactam production;  Replacement of the Interiors of Ammonia Reactors – improvement of ammonia quality and higher energy efficiency;  Upgrade of the Water Demineralisation Unit – introduction of new technologies and higher efficiency of demineralised water production;  Alteration of the Unit for CO2 Removal from Gas in the Ammonia Synthesis Process – replacement of 150K2 absorbers – improvement of the quality and efficiency of ammonia production;  Modernisation of the Ammonium Nitrate Packaging Shop – full automation of the ammonium nitrate packaging process and meeting the market's expectations as to packaging standards;  Modernisation of Measurement and Control Equipment at the Ammonia Production Unit – improvement of ammonia production efficiency.

New investment projects  Production of Solid Fertilisers Based on Urea and Ammonium Sulphate. The project involves construction of a production unit to manufacture PULGRAN®S solid fertilisers, as well as construction of a logistics and distribution complex. PULGRAN®S, produced on the basis of urea and ammonium sulphate (components produced by ZA Puławy), is a bi-component fertiliser providing cultivated plants with nitrogen and sulphur through a single application. The logistics and distribution complex auxiliary to the solid fertilisers production unit will enable highly advanced and fully automated palletising, storage and loading of urea, urea based products and ammonium sulphate from the PULGRAN®S unit. Moreover, the complex will be adapted to receive ammonium sulphate from both the Flue Gas Desulphurisation Unit at the Company’s heat and power plant, and from the caprolactam unit. Implementation of the project will enable ZA Puławy to sell new products and generate additional revenue.  Production of Liquid Fertilisers Based on Urea and Ammonium Sulphate. The project comprises construction of a production line for PULASKA® liquid fertilisers, as well as construction of tanks for the production and storage of liquid fertilisers. PULASKA® is a bi-component liquid fertiliser produced on the basis of urea and ammonium sulphate, providing cultivated plants with nitrogen and sulphur through a single application. Addition of a corrosion inhibitor makes the product suitable for longer storage in steel tanks. The product may also serve as feedstock for the production of UAN-S. Tanks for liquid products, constructed as part of the abovementioned project, give the Company an ability to adjust the production of urea and ammonium sulphate-based liquid fertilisers to market changes, and flexibility in the production of liquid chemical products. Implementation of the project will enable ZA Puławy to sell new products and generate additional revenue.  Construction of Ammonia Storage and Distribution Facilities. The project involves construction of an ammonia storage tank with a planned capacity of 15,000 tonnes, which will enhance the efficiency and safety of the Company’s operations. Implementation of this project will enable the Company to better utilise the production capacities of both the ammonia unit and the fertiliser units. The new ammonia storage tank will serve as a safety buffer useful during periods of reduced supply of natural gas and oxygen, and will also help streamline ammonia trading and improve the Company's efficiency in this area. Indirectly, the project will also help meet the Company’s strategic objective of diversifying gas supplies by enhancing the importance of ammonia as a feedstock buffer.

Environmental protection  Construction of the flue gas desulphurisation unit – reduction of SOx emissions

In each case involving the disposal of non-current assets (as defined in applicable accounting regulations) with a value exceeding EUR 50,000, the Company’s Management Board applied for approval to the other governing bodies, in compliance with the Company’s Articles of Association. Decisions of the Company's governing bodies  Pursuant to Resolution No. 95/2010/2011 of the Management Board of Zakłady Azotowe Puławy S.A. dated September 28th 2010 and Resolution No. 343/VI/2010 of the Supervisory Board of Zakłady Azotowe

26 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Puławy S.A. dated October 4th 2010, as well as later resolutions, the capital expenditure budget for the financial year 2010/2011 was set at PLN 292,876.0 thousand.  The Management Board issued its positive opinion concerning 21 investment projects with a total value of PLN 184,045.0 thousand and six projects involving the purchase of a finished product with a total value of PLN 889.9 thousand.  The Supervisory Board issued its positive opinion regarding (= approved) purchase by the Company of property, plant and equipment as part of the 21 investment projects with a total value of PLN 184,045.0 thousand and two projects involving the purchase of a finished product with a total value of PLN 640.0 thousand.  The Annual General Shareholders Meeting approved the acquisition by Company of non-current assets for two investment projects with the total value of PLN 133,000.0 thousand.  On December 16th 2010, the General Shareholders Meeting made a decision to implement the investment project providing for the construction of large ammonia storage and distribution facilities, designed to improve the efficiency and security of the Company's operations.

Progress status as at June 30th 2011 of the planned investment projects presented in ZA Puławy’s issue prospectus Project description Progress status Project type: Expansion of production capacity Purpose: Raising production capacity to match increased market demand Project CAPEX (as shown in the Prospectus): PLN 78m Expenditure incurred from the construction start date until June 30th 2011: PLN 67m Expansion of the production capacity by recovering melamine from process solutions. At the same time, the project will enhance The melamine recovery project has already been the efficiency of the melamine units (through completed. more effective use of feedstock) and will help reduce the environmental impact of the urea units interoperating with the melamine units. Enhancement of the liquid fertiliser The project was reviewed in the light of the situation production capacity and expansion of the prevailing on the market of liquid and granulated finished product storage capacity. The project fertilisers. As the review failed to identify any definitive will increase the flexibility of fertiliser arguments for the project’s economic viability, on production and distribution processes, which February 28th 2007 the Management Board of ZA in turn will help mitigate the seasonality Puławy decided to suspend the project until the market effect in the area of fertiliser production. conditions change. When the market situation reversed, the Company resumed work on the development of a new concept for storage capacity construction, based on manufacturing of innovative liquid products, with the use of the Company’s existing resources (the decommissioned sodium perborate unit). Based on this concept, on April 19th 2010, the General Shareholders Meeting approved implementation of the investment project named “Production of Liquid Fertilisers Based on Urea and Ammonium Sulphate”. On August 24th 2010, Zakłady Azotowe Puławy S.A. obtained a permit to conduct a new business in the Puławy Subzone of the Starachowice Special Economic Zone, consisting in the production and distribution of the PULASKA® liquid fertiliser. A contract has been signed for the design work. The Company is in the process of obtaining administrative approvals and authorisations to perform construction work. The project is planned to be completed by June 30th 2013.

27 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Project type: Structural investments Purpose: Change of the current production structure in order to market substantially modified products Project CAPEX (as shown in the Prospectus): PLN 214m Expenditure incurred from the construction start date until June 30th 2011: PLN 8.2m Restructuring in the area of ammonium nitrate production as a result of which the A report containing positive conclusions and a Company is to launch production of new recommendation to proceed with the construction of a granulated fertilisers. The envisaged annual complex for the production of new ammonium nitrate- production capacity of the new unit is based products was prepared in 2011. Currently, work is approximately 800,000 tonnes. The Company ongoing on a more detailed budget for the project with intends to keep unchanged the total nitrogen a view to preparing the budget for submission to content in the fertilisers produced by the approval by the competent corporate bodies, which is existing units, and to enrich the new product expected to take place in the financial year 2011/2012. with additional components sought by customers. Investment project in the area of caprolactam production, following from the need to address customers’ requirements and the possibility of transporting caprolactam to The project has been completed. New equipment has markets where the growth of consumption of been purchased. It is used to convert the total solid caprolactam is expected to be the production of liquid caprolactam into flakes. strongest in the long term. The project is Additionally, the packaging process has been implemented in order to expand the modernised: the total production can now be palletised. caprolactam flakes production capacity from

70% of the total output to such a level that 100% of the Company’s caprolactam production can be in solid form (caprolactam flakes).

28 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Project type: New investments Purpose: Broadening the product range Project CAPEX (as shown in the Prospectus): PLN 68m Expenditure incurred from the construction start date until June 30th 2011: none Launch of new products, in line with the The business plan for a project named “Sorbitol adopted product portfolio expansion Production Complex” was drawn up, but subsequent strategy. The unit will produce up to 20,000 economic viability analyses indicated a deterioration of tonnes per year of a new product that will be the project’s economics relative to original assumptions, obtained through processing of hydrocarbons as well as a lack of interest in the product on the and sold mainly on the Polish market, where analysed markets, which prompted a decision to demand for this product has been so far suspend the project. satisfied almost entirely with imports from Western Europe. Investment project in the area of peroxide compounds, which will be the first step in the Negotiations conducted with the partner last year failed implementation of the Company’s strategy to bring the effect that the Company expected. Failure aimed at diversifying its product portfolio. of the negotiations resulted in suspension of work on The project will be carried out as a joint the project. Instead, work has been conducted on other venture of ZA Puławy and one of the world’s product diversification possibilities. leading producers of chemicals.

Project type: Efficiency improvements Purpose: Generation of incremental economic effects through upgrade of ZA Puławy’s industrial units Project CAPEX (as shown in the Prospectus): PLN 147m Expenditure incurred from the construction start date until June 30th 2011: PLN 180.8m

Planned investment projects related to the Work related to replacement of the reactors’ interiors at ammonia units, designed chiefly to reduce all the three synthesis units of Ammonia Plant I has the units’ energy intensity and improve their been completed. operational reliability. The projects include replacement of worn-out nodes with state-of- Work connected with the modernisation of the cooling the-art ones, process modifications, system in the ammonia synthesis loop at three units has deployment of computer-based controls, and been completed. modernisation of the existing plant and Modernisation of the synthesis gas compressors on two equipment. lines has been completed. As part of control systems modernisation, a distributive control system (DCS), as well as control and measurement equipment have been delivered. Modernisation of the following units has also been completed: Gas Preparation Units 2 and 3, Gas Synthesis Units 1, 2 and 3. Work continues on the control and measurement systems at: Gas Preparation Unit 1, Shared Facilities 1 and 2. Planned completion date: June 3rd 2012. Work on the 2nd and 3rd gas preparation lines, related to upgrade of the Benfield unit at Ammonia Plant II, has been completed. The lines have been operating smoothly, and achieve the designed operational parameters. A contract has been signed for the supply of an air turbocharger. Work related to mounting the air turbocharger has been scheduled for the second half of 2011. The whole range of work connected with modernisation of interior of one of the ammonia synthesis reactors at Ammonia Plant II has been completed.

29 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Caprolactam units: replacement of the Modernisation of the ammonium sulphate units has sulphuric acid units along with upgrade of the been completed. production process, similar work to be done Upgrade of the sulphuric acid and oleum units has been on the ammonium sulphate units; upgrade of completed. the cyclohexanone unit and the oxime node. Upgrade of the cyclohexanone unit has been completed.

By virtue of its resolution of February 28th 2007, the Management Board decided to abandon the oxime node upgrade project. Such a decision was prompted by the results of a technical and economic feasibility assessment of the proposed solution. In the area of power engineering: Work connected with the modernisation of the turbine modernisation of the turbine generator set, generator set has been completed. demineralised water unit and the heat Work connected with the modernisation of the heat feeding centre supplying the town’s heating feeding centre supplying for the town’s heating system system. has been completed. A new water demineralisation unit has been constructed under a turn-key contract. All the assembly work has been completed. Mechanical start-up, technical acceptance and trial run have been carried out. Activities are ongoing on measurements related to guaranteed characteristics. Unit tests are ongoing to confirm achievement of the guaranteed operational parameters. Planned completion date: December 31st 2011. Auxiliary utilities: modernisation of the An air dehumidifier has been purchased and mounted. instrument air unit and replacement of the Technical acceptance of the unit has been completed. nodal parts in its distribution network. Project type: Replacement investments Purpose: Improving safety and ensuring continuous operation of ZA Puławy’s industrial units Project CAPEX (as shown in the Prospectus): PLN 96m Expenditure incurred from the construction start date until June 30th 2011: PLN 30.1m The Company plans to focus its investment efforts in the area of power engineering on maintaining the current process steam A turn-key contract for the modernisation of Boiler No. production capacity. Completion of this 2 has been performed. project will ensure stable operation of the Company’s process infrastructure, which is now being expanded.

30 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Project type: Environmental protection Purpose: Adaptation of ZA Puławy’s industrial units to EU standards Project CAPEX (as shown in the Prospectus): PLN 103m Expenditure incurred from the construction start date until June 30th 2011: PLN 105.9m The planned investment projects relate to the Modernisation of three electrostatic precipitators at the CHP Plant. boilers of the Company’s CHP Plant has been completed. In connection with construction of the flue gas desulphurisation unit at ZA Puławy's CHP Plant, the contract with the Lead Designer is being performed, as part of which the necessary technical documentation is being prepared. A contract has been signed for the supply of technology and key equipment for the absorption node. A contract has been signed for the purchase of technology and key equipment for the ammonium sulphate crystallisation and processing unit. Construction of the oils and lubricants storage facility has been completed. Construction of the smoke stack is under way. The vendor of a flue gas monitoring system has been selected. Contractors have been selected to perform steel structures and steel-reinforced concrete structures. Vendors of fans, flue gas cooler and absorber, pumps (pump parts), mixers, tanks, hoists and overhead crane for the absorption node have been selected. The tank vendor for the absorption node has been selected. The tender procedure for the supply of centrifuges is under way. Vendors of pumps, tanks with mixers, hoists and overhead crane for the crystallisation node have been selected. The majority of the foundations have been laid. Construction of the steel structures is under way. Tender procedures are under way to award contracts for the performance of the absorption node piping, flue gas ducts and the crystallisation building. Planned completion date: December 31st 2012. Total project CAPEX (based on the Prospectus): PLN 706m Total expenditure incurred from the construction start date until June 30th 2011: PLN 391.9m

3.9. Research and development

The research and development work performed by the Company in the financial year 2010/2011 was primarily related to developing new and existing technologies, and enhancing the Company’s products. The key projects included:  production of new fertilisers containing phosphorus and potassium, as part of integration with the Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o. Group;  production of biodegradable plastics;  an international research project involving the use of nitrogen fertilisers containing sulphur.

In connection with the implementation of environmental protection related directives, which provide for the use of BAT3, Zakłady Azotowe Puławy S.A. has been involved in research on the implementation of an NOx reduction technology involving the use of urea solutions, as well as on the development of a method for activated sludge treatment.

3 Best Available Techniques 31 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

3.10 Strategic projects

Power Generation Project

On May 31st 2011, ZA Puławy signed memorandums of understanding to start cooperation with PGE Górnictwo i Energetyka Konwencjonalna S.A. (PGE GiEK). The tripartite agreement providing for transfer of rights to the Puławy Power Plant project from Vattenfall Generation Poland Sp. z o.o. to PGE Górnictwo i Energetyka Konwencjonalna S.A. and the joint venture agreement concluded between ZA Puławy and PGE Górnictwo i Energetyka Konwencjonalna S.A. marked the beginning of an important stage in the implementation of the Company's strategy in the area of power generation. Under the agreements executed on May 31st 2011, PGE GiEK assumed Vattenfall's rights and obligations related to the construction and operation of a power plant or CHP plant. Moreover, the agreement between ZA Puławy and PGE GiEK clarifies the terms and conditions of the project. The parties intend to construct and operate a power plant or a CHP plant with the capacity of approximately 840 MW, which may be further expanded. As has already been planned earlier, the project will be implemented through a special purpose vehicle – MELAMINA III Sp. z o.o. Its implementation depends on the fulfilment of a number of conditions, largely corresponding to those set forth in the joint venture agreement between ZA Puławy and Vattenfall of April 23rd 2010. The parties expect that the conditions should be met by June 30th 2012.

Police Project

On February 2nd 2010, ZA Puławy signed a memorandum of understanding with Zakłady Chemiczne Police S.A. regarding business cooperation. The MoU draws on the 2008 plans that were not pursued due to the global economic crisis. The new alliance signed by the Management Boards of the two companies chiefly provides for joint initiatives in the area of logistics and development projects. The following have been listed as other areas where potential joint initiatives may be launched: streamlining production, investment and overhaul processes at the fertiliser and ammonia units, and joint supporting activities in the areas of environmental protection and power supply. As a result of ZA Puławy's participation in the privatisation of Zakłady Chemiczne Police S.A., joint initiatives under the memorandum of understanding were suspended, and the memorandum of understanding expired on January 31st 2011. On November 30th 2010, the Management Board of ZA Puławy presented to the Minister of State Treasury key terms of the purchase agreement involving the shares in Zakłady Chemiczne Police S.A. (“Police”) held by the State Treasury. If approved, the key terms of the agreement could serve as a starting point for further negotiations. ZA Puławy proposed that, subject to a prior restructuring of Police's debt, Police's share capital should be increased through a new issue of shares to be acquired by ZA Puławy and that ZA Puławy would acquire 7,500,000 of Police shares from the State Treasury, which in effect would result in ZA Puławy coming to hold up to 33% of Police's share capital. On January 17th 2011, the Management Board of ZA Puławy S.A. received a letter from the Ministry of State Treasury to the effect that the Ministry withdraws from the negotiations and terminates the privatisation procedure of Zakłady Chemiczne Police S.A. leaving it unresolved.

Acquisition of, and integration with, the GZNF Fosfory Group

On December 16th 2010, Ciech S.A. of Warsaw and ZA Puławy entered into a conditional share purchase agreement concerning the shares in Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o. of Gdańsk. The agreement provided for the sale of 51,855 shares in GZNF Fosfory, with a par value of PLN 500 per share, representing 89.46% of the company's share capital. As at the transaction closing date (April 27th 2011) the purchase price was PLN 106.7m, as determined by the parties based on the estimated enterprise value and estimated net debt. Furthermore, ZA Puławy repaid to the Ciech S.A. the loans advanced by Ciech S.A. to GZNF Fosfory and its subsidiaries, in the total amount of PLN 121.4m, which were assumed by ZA Puławy under the agreement. The legal structure of the agreement met the standards applicable in business to agreements of such type and gave ZA Puławy the transaction safety level that was achievable given the legal and practical situation of the target company as well as ZA Puławy's knowledge of the target company.

32 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

The key drivers behind the Company's decision to acquire Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o. were as follows:

 Strengthening the market position - Acquisition of Gdańskie Zakłady Nawozów Fosforowych by ZA Puławy would create a unique player on the Polish fertiliser production market, integrating manufacturing and distribution. - The acquisition would provide for further consolidation of the Polish NPK compound fertiliser production industry. - The investment would be in line with the Company's strategy which, amongst other things, provides for growth through acquisitions.  Broadening the product range - The combined entity would offer the full product range with respect to nitrogen and compound fertilisers. - Adding new fertilisers to GZNF Fosfory's product offering would allow the company to better respond to the farmers' changing needs and possibilities . - Inclusion of the cargo handling services in the product mix would further diversify revenue sources. - Whether GZNF Fosfory continues production of sulphuric acid or not would depend on development of the sulphuric acid to sulphur price ratio.  Broadening the distribution network - The acquisition would strengthen ZA Puławy's competitive position thanks to GZNF Fosfory's (the Agrochem companies') own distribution network, which gives direct access to end customers.  Access to logistics base - The attractive port infrastructure owned by GZNF Fosfory would allow the combined entity to achieve its strategic goals and would support the operations of Bałtycka Baza Masowa Sp. z o.o. of Gdynia.  Synergies - ZA Puławy has provisionally identified a number of areas where the combined entity may significantly benefit from the acquisition. These areas include, among other things, sales, distribution and product development. - Possible significant synergies in the case of further consolidation of the sector.

Pursuant to its decision of February 8th 2011, the Company's Management Board established an Integration Office responsible for development of a strategy for shareholder value growth in connection with the acquisition of control over Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o. As part of its operations, the Integration Office has set detailed targets and functional programmes related to value growth based on synergies between the two companies. Following the acquisition of GZNF Fosfory shares, at the end of May and beginning of June 2011 the Management Boards of the two companies set up a common Integration Office responsible for operational implementation of the initiatives prepared as part of the value growth programme, as well as development of new measures designed to maximise the Group's value. The value growth programme consists of several dozen initiatives with various economic parameters and specific schedule of operations.

REACH project

In October 2010, ZA Puławy discharged one of its most important obligations arising under Regulation (EC) No. 1907/2006 of the European Parliament and of the Council of December 18th 2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), by registering with the European Chemicals Agency (ECHA) its 16 products which are manufactured in a quantity of over 1,000 tonnes per annum. Consequently, as from December 1st 2010, the Company has been entitled to place its products on the market. In December 2010, the Company also performed its obligation under Regulation (EC) No 1272/2008 of the European Parliament and of the Council of December 16th 2008 on classification, labelling and packaging of substances and mixtures (GHS), by notifying to the ECHA relevant products (to which the REACH Regulation does not apply).

33 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

3.11 Environmental protection

The Company is among the industry leaders of efforts aimed to ensure compliance with environmental protection, safety and quality standards. Since 1985, it has implemented its own comprehensive environmental protection programme. Since 1995, it has been an active participant of Responsible Care, an international chemical industry initiative. On December 31st 2004, it was among the first entities in Poland, but also in Europe, to obtain an Integrated Permit. In the light of the IPPC (Integrated Pollution Prevention and Control) Directive, an integrated permit is a legal instrument whereby an installation is allowed to operate with due regard to all environmental protection and safety-related issues. The Company has implemented an Integrated Quality Management, Environmental Management, and Safety Management System in conformity with the ISO 9001:2008, ISO 14001:2004 and PN-N 18001:2004 standards. It has developed and put in place procedures aimed to comprehensively manage waste and packaging generated during the production and ancillary processes. The Company’s products are manufactured with the use of technologies compliant with the BAT4 standards. This means that not only the production process but also the design, construction, operation and decommissioning of process units are carried out using the best available techniques. Based on the best available techniques, the Company is able to set emission limits with a view to eliminating noxious emissions, or – where full elimination is not practicable – reducing such emissions and their environmental impact as much as possible. Directive 2010/75/EC of the European Parliament and of the Council concerning industrial emissions (IED) makes it obligatory the apply the so-called BAT conclusions when issuing permits to operate industrial installations. In connection with the above Directive, the process of reviewing and establishing new BAT reference documents (the basis for preparing BAT conclusions) is currently under way across the European Union. The Company wants to be actively involved in that process.

Integrated permit

Zakłady Azotowe Puławy Spółka Akcyjna holds an integrated permit to operate installations (Decision No. PZ 7/2004, ŚiR.V.6618/31-5/04 of December 31st 2004), issued by the Lublin Provincial Governor, and subsequently extended under the Lublin Provincial Governor's decision of December 12th 2007, the Lublin Provincial Marshall's decision of November 25th 2008 and again the Lublin Provincial Marshall's decision of July 27th 2010. The decision expires on December 30th 2014.

Integrated management system

Zakłady Azotowe Puławy S.A. has in place an integrated management system covering the production and sale of mineral fertilisers, caprolactam, melamine, hydrogen peroxide, polyethylene products, industrial gases, AdBlue® and other chemicals, as well as electricity and heat, along with the analytical laboratory control, compliant with the ISO 9001:2008, ISO14001:2004 and PN-N 18001:2004 standards.

Certificates held

 ISO 14001:2004 Environmental Management System Certificate;  PN-N 18001:2004 Polish Safety Management System Certificate;  ISO 9001:2008 Quality Management System Certificate;  ISO 9001:2008, ISO 14001:2004 and PN-N 18001:2004 Integrated Quality Management, Environmental Management, and Safety Management System Certificate; all valid until March 7th 2013, and  Food Safety Management System Certificate confirming compliance with the ISO 22000 standard, issued by BV Cert. and valid until June 24th 2014 (the certificate covers the production and sale of industrial gases);  Accreditation Certificate for the Health and Safety Laboratory confirming compliance with the ISO 17025:2005 standard, issued by the Polish Accreditation Centre, valid until November 15th 2013.

4 Best Available Techniques 34 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Certificate of the Product Stewardship Programme for fertilisers

In August 2003, Fertilizers Europe (then: EFMA) established the Product Stewardship Programme for fertilisers with the aim to:  ensure that products are responsibly managed at every stage of their life cycle (from purchase of raw materials to application),  meet the public's demand for transparency and communication,  share related experience and knowledge. As a member of Fertilizers Europe, Zakłady Azotowe Puławy S.A. has passed twice (most recently in March 2011) the Product Stewardship certification process, in which external auditors inspected the effective use of procedures designed to ensure safety to both humans and the environment throughout the fertiliser production cycle. The auditors recommended that ZA Puławy S.A. be issued the FE Certificate for another three years.

Product certification

 Quality Mark Q certificates for fertilisers (urea, ammonium nitrate and UAN-RSM®), issued by Polskie Centrum Badań i Certyfikacji S.A., valid until April 2nd 2013;  EC FERTILIZER mark certificates for fertilisers (urea, ammonium nitrate and UAN-RSM®), issued by Polskie Centrum Badań i Certyfikacji S.A., valid until May 11th 2014.

Responsible Care

On October 6th 2010, at the Chemical Industry's Environmental Forum held in Toruń, Zakłady Azotowe Puławy S.A. received a certificate confirming the implementation of the Responsible Care Framework Management System (valid until December 31st 2013).

Charges for economic use of the environment

In the financial year 2010/2011, the Company paid the following charges for economic use of the environment:

Jul 1 2010 Jul 1 2009 Change PLN '000 –Jun 30 2011 –Jun 30 2010 (%) 1 2 3 4=2/3 Air emissions 7,393 7,140 103.5 Sewage 1,341 1,043 128.5 Water consumption 5,584 4,392 127.1 Waste 123 115 106.9 Total 14,441 12,690 113.8

The increase in the water consumption charges follows from:  increased intake of water from the Vistula river;  a rise in the charges by approx. 4% year on year in the first half of 2010/2011, and by approx. 3.4% year on year in the second half of 2010/2011. The higher charges for sewage are attributable to:  an increase in the COD (chemical oxygen demand) discharge to the Vistula river in the first half of 2010/2011, caused by heightened water levels in the Vistula river (flood levels) and overhauls of process units;  a rise in the charges by approx. 4% year on year in the first half of 2010/2011, and by approx. 3.4% year on year in the second half of 2010/2011;  a higher volume of sewage discharge compared with the same period of 2009/2010.

35 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

The increase in the charges for air emissions was caused by:  a rise in the charges by approx. 4% year on year in the first half of 2010/2011, and by approx. 3.3% year on year in the second half of 2010/2011;  a 26,500 Mg increase in the quantity of burnt coal relative to the corresponding period of the previous year. The increase in the charges for storage of waste is attributable to:  a rise in the charges by approx. 4% year on year in the first half of 2010/2011, and by approx. 3% year on year in the second half of 2010/2011;  an increase in the quantities of sludge generated during biological treatment of industrial sewage.

Environmental measures undertaken in the 2010/2011 financial year

Air protection:  Construction of a Flue Gas Desulphurisation Unit for boilers – the project is scheduled for completion in 2012. In the financial year 2010/2011, work executed as part of this project included construction work on the sulphur dioxide absorption and crystallisation nodes, completion of the concrete shaft of a new stack, and preliminary phases of assembly work on a steel stack and a plastic stack.  Construction of a catalytic NOx reduction unit on the L214 line of the nitric acid facility. The target reduction of atmospheric NOx emissions is approximately 90%.

Water protection:  Completion of a water demineralisation plant. The planned environmental benefits include reduced consumption of feedstock and of underground and surface water intake, reduced volumes of sewage discharge, and uninterrupted supply of demineralised water.

Waste management:  Expansion of the non-hazardous and non-neutral waste disposal site by raising the dykes of the individual cells by 3m. The project is scheduled for completion in the fourth quarter of 2011. The planned effect is an increase of the site capacity. The site storage capacity is to increase by about 600,000 million cubic metres.  85,000 tonnes of fly-ashes (code: 100102) were used for production of construction materials.

Environmental protection regulations

Emissions Trading System (ETS) III

By way of Directive 2003/87/EC of the European Parliament and the Council, dated October 13th 2003, the European Union established a trading system for greenhouse gas emission allowances in the Community (EU ETS – European Union Emissions Trading System). The directive primarily applies to combustion installations and defines rules for the operation of the system, including division into two settlement periods. During the first period (2005–2007), the infrastructure necessary to monitor, notify and revise actual emissions from the facilities covered by the system was built. For the second period (2008–2012), emissions reduction has been assumed at volumes enabling the requirements of the Kyoto Protocol to be met, through the reduction of the volumes covered by emission allowances to the level 6.5% below the 2005 level. Further regulations concerning emission allowance trading are stipulated under Directive 2009/29/EC of the European Parliament and the Council (ETS Directive) dated April 23rd 2009 and amending Directive 2003/87/EC referred to above. The ETS Directive primarily relates to the period 2013–2020, referred to as the third phase of the Emissions Trading System (ETS III). The main changes to be introduced after 2013 provide for a gradual replacement of the free-of-charge allocation of allowances by an auction-based scheme as well as inclusion of additional types of activities and greenhouse gases in the system. One of the industries to have been added to the ETS system is the chemical sector, where ammonia and nitric acid production facilities are the largest contributors to greenhouse gas emissions (ammonia and nitric acid are the key semi-products for the production of nitrogen fertilisers). The document stipulating detailed rules for the computation of free allowances is the Commission Decision determining transitional Union-wide rules for the harmonised free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC, formally adopted on April 27th 2011. Given the lack of similar solutions in other regions of the world (as well as the lack of will to implement equally restrictive legislation), the Directive may be expected to significantly impact the competitiveness of the European industry, including the chemical industry.

36 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Until June 30th 2011, the Company obtained greenhouse gas emission allowances for all of its production units covered by the system. Currently, in cooperation with KOBIZE (National Centre for Emission Balancing and Management), the Company is determining the quantity of free greenhouse gas allowances for 2013–2020. Given the high planned ratio of utilisation of the production capacities, it is estimated that in 2013–2020 the Company will need to purchase around 1.3m emission allowances a year. The deficit of allowances will be significantly limited once the new gas-fired Power Plant has been commissioned and comes online as an additional source of electricity and heat.

IED Directive

Another piece of legislation currently being implemented in the EU member states is Directive 2010/75/EC of the European Parliament and the Council concerning industrial emissions (IED). The Directive imposes controls of air pollutant emissions (including SO2, NOx and dusts) from combustion plants. As BAT conclusions (documents which are to serve as the basis for issuing/amending operating permits) have not been developed yet, it is not possible to precisely estimate the effect of the IED on the competitiveness of the chemical industry.

3.12 Workforce

As at July 1st 2010, the staffing level at ZA Puławy was 3,299 employees. As at June 30th 2011 it was 3,257 employees. In the financial year 2010/2011, the Company hired 155 new persons and terminated employment with 211 persons. In the reporting period, 14 employees took rehabilitation or parental leave, whereas 20 employees returned to work from such leaves.

Employment in the financial year 2010/2011

Average annual staffing level Staffing level as at Jul 1 2010 Jul 1 2009 Jun 30 2011 Jun 30 2010 – Jun 30 2011 – Jun 30 2010 Blue-collar 2,110 2,126 2,083 2,109 employees White-collar 1,186 1,193 1,174 1,198 employees Total 3,296 3,319 3,257 3,307 Employees working at main production 1,150 1,150 facilities Employees working at auxiliary 468 466 production facilities

In the financial year 2010/2011, the Company carried out organisational audits in order to determine the number of employees required in each organisational division. The organisational audits (expected to be completed by the end of the financial year 2011/2012), combined with the scheduled statutory retirement of some and early retirement of other employees, will enable the Company to determine the optimum staffing levels. Furthermore, in order to reduce personnel costs, ZA Puławy has been using the services of temporary employment agencies to fill seasonal vacancies on the basis of flexible forms of employment. The Company applies the remuneration system defined in the Collective Labour Agreement of March 22nd 2006, as amended. Depending on the type of work performed by an employee, two main remuneration systems apply, i.e. the hourly and piece-work systems. The remuneration includes a base pay and a allowance paid to employees who work in shifts. The remuneration table presents base pay ranges for each payroll category.

37 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Moreover, the Company has introduced the Bonus Scheme Rules. In line with the Rules, the bonus amount granted to an employee depends on the achievement of objectives and performance of tasks at the level of the Company as a whole and at the level of an individual employee.

Average gross monthly remuneration in the financial year 2010/2011, without profit distributions (in PLN): Jul 1 2010 Jul 1 2009 Change (%) – Jun 30 2011 – Jun 30 2010 Average remuneration at the 4,606 4,432 103.9 Company

Changes in remuneration terms

On October 25th 2010, the Company signed an agreement with Niezależny Samorządny Związek Zawodowy Solidarność Z.A. Puławy S.A., Międzyzakładowy Związek Zawodowy Pracowników Z.A. Puławy S.A., Międzyzakładowa Organizacja Związku Zawodowego Inżynierów i Techników and Związek Zawodowy Pracowników Ruchu Ciągłego (trade unions) concerning the average monthly remuneration growth rate in the financial year 2010/2011. The rate was set at 3%. The actual average monthly remuneration growth rate for the financial year 2010/2011 was 3.9%. The remuneration growth rate was higher than expected due to the reduction of staffing levels, mainly through employees going into retirement, which entailed one-off severance payments.

The following documents were signed in order to ensure that the agreed remuneration growth rate is met: - Memorandum of Understanding, dated October 25th 2010, concerning payment of one-off cash benefits to the Company's employees, concluded between the Company and all trade unions active at ZA Puławy; - Collective Labour Decision No. 1/2010/6 of October 25th 2010, made under the Collective Labour Agreement, concerning introduction as of January 1st 2011 of incentive increase in base pay and shift allowance for the Company's employees.

On April 4th 2011, the Company and all trade unions active at ZA Puławy S.A. concluded a Memorandum of Understanding concerning the payment of: - one-off benefits for employees in connection with ZA Puławy's good performance under the extraordinary technological, production and investment regime to which all the workforce was subject; - awards marking the 50th anniversary of ZA Puławy S.A.; - awards marking the annual Chemist's Day.

Mass redundancies

ZA Puławy did not carry out any mass redundancies and applied a policy aimed at optimising workforce through scheduled retirement of employees and allocation of workers within the Company according to the needs.

Collective disputes

In the financial year 2010/2011, none of the Company Trade Unions active at Zakłady Azotowe Puławy S.A. initiated any collective disputes on behalf of the employees.

Termination, suspension or conclusion of company or collective labour agreements

In the first half of the financial year 2010/2011, the Company signed two supplementary protocols to the Company Collective Labour Agreement with the Company Trade Unions. - Supplementary protocol of September 7th 2010, amending the provisions of Art. 8 in Section III “Remuneration” in order to adjust the provisions of the Company Collective Labour Agreement to the new legal framework emerging after the Act on Negotiation-Based System for Determination of Average Salary Growth Rates at Enterprises and Amendments to Certain Acts, dated December 16th 1994, ceases to apply as of January 1st 2010. - Supplementary protocol of April 4th 2011, introducing uniform nomenclature and a more precise definition of the term “average monthly remuneration” for the financial year 2010/2011.

38 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Training courses

In the financial year 2010/2011, training courses were organised for 4,769 employees. Their total cost amounted to PLN 1.62m.

Employee welfare activities

ZA Puławy maintains a Social Benefits Fund. In the financial year 2010/2011, employees received benefits of PLN 6.03m financed with the Fund’s assets.

3.13 Company's performance on the capital market

As at June 30th 2011, the price of ZA Puławy stock was PLN 118,50 per share, having risen by 85% relative to the beginning of the financial year (July 2010). The share price was the highest on May 19th 2011, when it reached PLN 128.1, and the lowest on July 1st 2010, when it fell to PLN 64.0 per share, 18% down on the first listing price in 2005. As at the end of June 2011, the Company was capitalised at PLN 2,265.13m. In the same period, the WIG index (see chart) gained 23%.

Events which may have had a material impact on the price of ZA Puławy stock: A. July 8th 2010: The Company concluded a significant agreement for sales of melamine with Fritz Egger GmbH & Co. The agreement, with the value of PLN 320m, terminates on June 30th 2014. B. July 23rd 2010: The Ministry of State Treasury announced that it had received four offers for the purchase of up to 9,686m shares (50.67%) in ZA Puławy. C. September 2nd 2010: The Company published its results for the financial year 2009/2010. Net profit amounted to PLN 35.5m, relative to PLN 187.0m a year earlier. D. September 24th 2010: Negotiations between Poland and Russia concerning the supply of natural gas to Poland – information that there is a threat that the supply of gas might be discontinued. E. October 19th 2010: ZA Puławy made a firm offer to Ciech S.A. to purchase 89.46% of shares in Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o. (51,855 shares, representing 89.46% of the company's share capital). F. October 20th 2010: The Company received information that the Vattenfall Group had revised its investment plans, including the plans to construct a power plant jointly with ZA Puławy. Vattenfall proposed to enter into negotiations concerning possible termination of the agreement and the terms of such termination, which would allow ZA Puławy to proceed with the project in a new configuration, e.g. with a new partner. G. October 27th 2010: The Supervisory Board approved the proposal submitted by the Management Board of ZA Puławy to pay PLN 19,115,000 (PLN 1 per share) as dividend from the profit generated in the financial year 2009/2010. H. November 15th 2010: The Company published its results for Q1 2010/2011 (July 1st - September 30th 2010). The Company recorded a net loss of PLN (-) 38.51m, relative to a net loss of PLN (-) 33.01m a year earlier. I. November 15th 2010: The Company reported problems with performance of its melamine sales contracts due to a unit failure. J. December 16th 2010: The Annual General Shareholders Meeting of ZA Puławy resolved to pay out dividend from the net profit generated in the financial year 2009/2010 (in the total amount of PLN 19,115,000, i.e. PLN 1 per share), and approved the purchase of PLN 108.5m worth of non-current assets as part of the “Construction of Ammonia Storage and Distribution Facilities” investment project. K. December 16th 2010: Execution of agreement on purchase of shares in Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o. L. January 4th 2011: Execution of new contracts concerning export of caprolactam to Asian markets. The value of the contracts effective in 2011 was estimated at PLN 365m, which accounted for approximately 50% of the Company's annual production capacity.

39 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

M. February 28th 2011: Publication of results for Q1 and Q2 of the financial year 2010/2011 (July 1st 2010–December 31st 2010). The Company reported a consolidated net loss of PLN 21.40m, relative to a loss of PLN 48.00m for the first two quarters of the previous financial year, with revenue of PLN 1,097.06m and 898.41m for the respective periods. N. March 3rd 2011: Execution of an annex to the agreement on purchase of natural gas concluded with PGNiG S.A. on January 14th 1999. Under the annex, the volumes of gaseous fuel and contracted capacity were to be increased relative to previous years, as required in connection with the launch of new production capacities by the Company. O. March 11th 2011: The earthquake in Japan and problems with the nuclear reactor, as well as the downgrading of the credit ratings of Greece and Portugal by S&P, combined with a change in ECB's approach to interest rate rises, unsettled global exchanges. However, the stock price declines in response to the news were rather short lived. (Dom Inwestycyjny BRE Banku S.A.) P. May 13th 2011: Publication of results for Q3 of the financial year 2010/2011 (January 1st 2011– March 31st 2011). ZA Puławy reported a consolidated net profit of PLN 197.83m, against a profit of PLN 38.58m reported in Q3 of the previous financial year.

3.14 ZA Puławy’s position in rankings

In the financial year 2010/2011, ZA Puławy received the following awards and distinctions:  Highly Esteemed Company title in the third edition of the PremiumBrand programme;  Gold medal at the Expochem Fair in Katowice for the hydroxylamine production method;  Gold medal at the Expochem Fair in Katowice for the method of preparation of cyclohexanone oxime with a reduced water content;  Award in the Export category from Czesław Sikorski, PhD, Member of the European Parliament;  Nominee in the Well-Perceived Company contest for a company with the best image in the context of corporate social responsibility in the Lublin province.

40 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Company’s Ranking Category Published in position Ranking of 1000 Largest Companies in Gazeta Finansowa 131 By revenue Poland June 24th-30th 2011 Polityka, No. 20 The 500 by Polityka weekly 103 By sales revenue of May 11th-17th 2011

Polityka, No. 20 The 500 by Polityka weekly 5 Chemical industry by sales revenue of May 11th-17th 2011

Polityka, No. 20 The 500 by Polityka weekly 2 Companies by provinces - Lublin province of May 11th-17th 2011

Ranking of companies in which the State Polityka, No. 20 The 500 by Polityka weekly 27 Treasury holds a stake of May 11th-17th 2011 Polityka, No. 20 The 500 by Polityka weekly 37 Largest exporters of May 11th-17th 2011 Rzeczpospolita, The List of 500 by Rzeczpospolita daily 106 Tentative valuation April 20th 2011

Rzeczpospolita, The List of 500 by Rzeczpospolita daily 153 By sales revenue April 20th 2011 The 100 by Kurier Lubelski daily - Ranking Kurier Lubelski of the largest companies in the Lublin 4 Revenue in 2010 of June 13th 2011 Province The 100 by Kurier Lubelski daily - Ranking Kurier Lubelski of the largest companies in the Lublin 5 Highest profit in 2010 of June 13th 2011 Province The 100 by Kurier Lubelski daily - Ranking Kurier Lubelski of the largest companies in the Lublin 3 Largest investors in 2010 of June 13th 2011 Province The 100 by Kurier Lubelski daily - Ranking Kurier Lubelski of the largest companies in the Lublin 5 Largest employers in 2010 of June 13th 2011 Province The 100 by Kurier Lubelski daily - Ranking Kurier Lubelski of the largest companies in the Lublin 1 Largest exporters in 2010 of June 13th 2011 Province The Gold 100 - Ranking of the largest Dziennik Wschodni 3 Revenue in 2010 companies in the Lublin Province of June 14th 2011

The Gold 100 - Ranking of the largest Large companies - employing more than 250 Dziennik Wschodni 3 companies in the Lublin Province persons of June 14th 2011

The Gold 100 - Ranking of the largest Dziennik Wschodni 1 Industry companies in the Lublin Province of June 14th 2011

The Gold 100 - Ranking of the largest Dziennik Wschodni 5 Most profitable companies companies in the Lublin Province of June 14th 2011

The Gold 100 - Ranking of the largest Dziennik Wschodni 5 Largest employers companies in the Lublin Province of June 14th 2011

The Gold 100 - Ranking of the largest Dziennik Wschodni 1 Largest exporters companies in the Lublin Province of June 14th 2011 The Gold 100 - Ranking of the largest Dziennik Wschodni 3 Largest investors companies in the Lublin Province of June 14th 2011

3.15 Sponsorship activities

Sponsorship activities in the financial year 2010/2011 were carried out on the basis of resolutions passed by the Company’s Management Board (Resolution No. 56/2010/11 of August 24th 2010) and approved by the Supervisory Board (Resolution No. 336/VI/2010 of August 31st 2011). ZA Puławy has adopted the Sponsorship and Social Support Policy, which is available on the Company’s website. In the financial year 2010/2011, the Company entered into five sponsorship agreements for the total amount of PLN 2,43m. The value of all the agreements exceeded the equivalent of EUR 5,000 and, pursuant to Art. 19b of the Polish Commercialisation and Privatisation Act of August 30th 1996, the agreements were approved by the Supervisory Board. The agreements were signed with the following parties:  KS Azoty-Puławy (a men’s handball club; the senior team plays in Poland' prime league “Ekstraklasa”);  SPR Lublin SSA (a women’s handball club; the senior team plays in Poland' prime league “Ekstraklasa”);

41 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

 KS Wisła (a multi-disciplinary club: the senior football team plays in the second league – promotion in June 2011; the women's weightlifting team competes in prime league “Ekstraklasa”);  Konrad Czerniak - multiple swimming champion of Poland.

In the financial year 2010/2011 the Company's Management Board gave 31 donations totalling PLN 0.51m, three of which exceeded the equivalent of EUR 5,000 (in-kind donation (fertilisers) for the victims of the 2010 flood from the Wilków and Janowiec communes, financial donation to the Burn Treatment and Plastic Surgery Association of Łęczna), and, pursuant to Art. 19b of the Act on Commercialisation and Privatisation of August 30th 1996, had to be approved by the Supervisory Board. The other donations supported educational projects and cooperation with higher education institutions, health protection, promotion of physical education, culture, arts, protection of historical sites and national heritage, and charity organisations. The Company also provided support for its existing and former employees facing financial difficulties due to fortuitous events, as well as for organisation of the following environmental education projects: “Chemistry in agriculture”, “Catch the Hare”, “Academy of Ecological Skills” and “Tree for a Bottle”. The strategic goals set out in the Company's “Sponsorship and Social Support Policy” are as follows:  Building a positive image of the Company as a chemical manufacturer by promoting the association of its brand with a positive perception of the activities carried out by the entities sponsored by the Company;  Promotion of the Company's brand and products by increasing awareness outside the group of the Company's customers;  Supporting promotional and sales activities;  Creating a positive image of the Company among children and youngsters;  Building the Company's reputation and winning the appreciation and recognition of the general public, particularly in connection with ZA Puławy's positive role in solving the problems of its region and meeting environmental challenges of the modern world;  Increasing the attractiveness of the Puławy region as a place for business growth.

As regards the above goals and in the light of “The Survey of Awareness of ZA Puławy's Sponsorship Activities” carried out in March 2010 and the results of “The Survey of Media Effectiveness of Sponsorship Activities” in the period January-April 2011, in the financial year 2010/2011 the Company expected the following results:  Maintaining the same level of recognition of the Company's sponsorship activities in the Puławy county and the Lublin province with a smaller budget than in 2009/2010 and a lower number of sponsorship partners, as confirmed by surveys to be carried out in spring 2011. Performance: The awareness of ZA Puławy's sponsorship activities in the Puławy county rose from 48% in 2009/2010 to 61% in 2010/2011. The awareness of ZA Puławy's sponsorship activities in the Lublin province rose from 15% in 2009/2010 to 30% in 2010/2011.  Maintaining the media effectiveness of sponsorship activities, with respect to both the ZA Puławy brand and the AdBlue® Puławy brand, with a smaller budget than in 2009/2010 and a lower number of sponsored entities, as confirmed in surveys covering the period January-April 2011. Performance: The value of exposure of logotypes in the media rose. According to surveys carried out by Pentagon Research for the period from January to April 2011, the value of logotype exposure was PLN 0.24m, compared with PLN 0.21m in the same months of 2010. The number of exposures also rose, from 1,163 in 2010 to 1,366 in 2011. The value of articles containing the key words in the Company's sports promotion (AdBlue® and Azoty Puławy) without logotype exposure rose in the period from January to April 2011, from PLN 1.10m in 2010 to 1.17m in 2011. The overall media effectiveness rose by PLN 106 thousand.  Winning at least one objective award in national competitions and rankings in the area of corporate social responsibility. Performance: The Company was nominated in the Well-Perceived Company contest for the best image in the context of corporate social responsibility in the Lublin province (one of five nominations). The Company also came second in the Pillar of Poland’s Economy contest – members of the Lublin local government appreciate ZA Puławy not only as a company boasting a sound financial performance, but also as a business vital for the region, particularly appreciated as a company contributing to the benefit of the local community; the Company found itself among the winners of the contest for the sixth time.  Higher number of press releases and publications concerning the Company's CSR projects.

42 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Performance: In the financial year 2010/2011 the Company prepared and distributed seven press releases concerning its corporate social responsibility activities (two press releases more than in the previous financial year).  Broader interest in the Company's activities following environmental education events organised as part of the Responsible Care programme. Performance: The Company organised a second educational campaign named “Ecological Academy of Skills” as part of the Responsible Care Programme. Twenty-four teachers from more than a dozen schools in Puławy were involved. The project received a positive response from its participants, as confirmed by surveys carried out during the campaign. The event was also covered by the local media (TVK Puławy, Radio Lublin, Twoje Radio Puławy, Kurier Lubelski). The finals of the second edition of the “Academy” took place as part of the methodological conference “Solar Chemistry” held on June 7th, organised jointly with SITPChem and the “Chemik” monthly as part of the International Year of Chemistry.

Furthermore, there was another edition of the Tree for a Bottle event, which attracted new educational institutions. The event was exceptionally successful in terms of volume of material collected (first place in Poland). It received local media coverage by TVP Lublin, TVK Puławy, Radio Lublin, Radio Eska, Radio eR, Twoje Radio Puławy, Dziennik Wschodni, Gazeta Wyborcza of Lublin, Kurier Lubelski, and Tygodnik Powiśla. Environmental education and social events were also the subject of articles in industry monthly “Press” and the “Ekopartner” monthly.

4. External environment, factors and events with a bearing on the Company’s operations, financial performance and growth

Situation in the agricultural sector

Good economic conditions on the Polish grains market boosted the demand for means of agricultural production. High prices of mineral fertilisers were partially attributable to payments of direct subsidies to farmers, increased purchases of fertilisers before the spring season, as well as increased VAT rates applicable in particular to mineral fertilisers. At the beginning of 2011, the growth of prices of means of agricultural production accelerated. Rising prices of mineral fertilisers were accompanied by increases observed on the markets of direct energy carriers, construction materials and agricultural machinery. Despite the clear increase in prices of mineral fertilisers, the relationship between mineral fertiliser prices and prices of grains improved.

Grains market – globally

In the international markets, prices of grains followed an upward trend. Sharp increases in grain prices came as a result of a grains export ban imposed in Russia in August 2010 in the wake of poor harvest due to weather anomalies, the wheat, maize and barley export quota imposed by the Ukrainian Ministry of Economy, as well as growing prices of food and increased demand for grains from North African and Middle East countries.

Grains market – Poland

On the domestic market, prices of grains in 2010/2011 were on an upward trend. Price drops were recorded only in October 2010 and March 2011 and only in the case of wheat and rye. Over the same period, prices of fertilisers grew strongly and, for some time, they became higher in terms of the relationship of mineral fertiliser prices to price of grains.

Situation in the chemical sector

In 2010, the global production of chemicals (without taking into account the pharmaceutical industry) grew by 9.3%. After two years of production decreases, the industry reached its pre-crisis output levels. In the 2010/2011 financial year, factors favourable to the industry growth included large demand and inventory replenishment by key customer groups. The largest increases were recorded in Asia (excluding Japan), where production grew by about 13%, and the European Union (a 10.1% increase). The increase seen in Asia was primarily attributable to China, where chemical companies were assisted by governmental programmes aimed at stimulating the economy. In Japan, production grew by 8.8%, mainly owing to increased demand from the export-oriented automotive and electronic industries. Experts believe that in 2011 the industry will be growing 43 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011 at a slower pace than in 2010. Forecasts for the industry provide for a 5.2% increase in the global production. The largest growth is expected in Asia (excluding Japan), where the industry's output should go up by 9.6%. This dynamic growth in the region will again be mainly attributable to the developments in China, where the industry's output growth is expected to reach 12.1%. In the other parts of the global market, the output growth rate will be rather moderate. In South America the growth rate is forecast to reach 4.3%, in the USA – 3.3%, and in Europe – 2.9%. The main problem faced by Polish companies is the high price of natural gas, which is not always correlated with prices prevailing in the West European market.

Situation in other industries purchasing the Company’s products

Demand for the Company's chemical products depends mainly on the economic conditions in those sectors which are the end consumers of the Company's chemical products. Therefore the Company's operating performance is strongly determined by the growth of and overall economic conditions in such sectors as construction industry, furniture and home appliances industry, textile products, plastics, automotive industries, etc. Melamine is used for the manufacturing of a broad range of synthetic resins used in turn in the production of laminated decorative materials, wood-like boards, glues, paints and varnishes, also suitable for automotive industry, auxiliary materials for the textile and paper industry, plastics used in the electrical industry, and manufacturing of housewares. Caprolactam is used for production of polyamide fibres further processed into technical and textile yarn, or used for manufacturing of construction plastics, food packaging and packaging for surgical instruments. Hydrogen peroxide finds its application in the paper industry, where it is used for bleaching of high-output mechanically and chemo-mechanically obtained pulps, for colour removal and bleaching of wastepaper, and for bleaching of cellulose pulps. AdBlue® is used in the new generation Diesel engines employing the SCR (Selective Catalytic Reduction) technology.

Construction sector

The debt crisis observed in numerous countries in the wake of the economic crisis of 2009, the reduced purchasing power of customers, increasing inflation and unemployment rates were the most important factors adversely affecting the performance of selected industries, including construction. The poor situation is additionally worsened by increasing fixed costs and consistently growing electricity prices. Among the segments of construction industry, the largest drop relative to the highest recorded production level (in 2007) was observed in residential construction. However, the situation is expected to improve slightly in 2011. In non-residential (office space) and public building construction segments the situation is relatively better. Situation is perceived as the best in the overhaul and infrastructure construction segments.

Furniture industry

The situation in the furniture industry has been stabilising. Its low growth rate is attributable to various factors, including increasing cost of raw materials, primarily wood-based boards and electricity. These factors have been driving a strong growth of prices, which translates into low sales. One of favourable developments on the Polish furniture market consists in restructuring and optimisation measures taken by numerous furniture manufacturers. Furniture manufacturers have generally expressed moderate or negative opinions on the economic situation. Nevertheless, the production rose, as has the exports value. According to Eurostat, in 2010 the exports value increased by 12.3% (relative to 2009). However, when translated into the Polish złoty, the exports value growth rate amounted to a mere 3.6%. If prices of raw materials and semi-finished products do not grow excessively, the current upward trend should continue, which has initially been corroborated by data for the first months of 2011.

Automotive industry

Currently, Poland ranks among the largest manufacturers of cars, automotive parts and subassemblies in Central and Eastern Europe, and the automotive industry itself is becoming one of the key sectors of Poland's industry, in terms of production value, employment numbers and investment expenditure, as well as a share in exports. In the period under analysis, and especially since the end of 2010, highly positive sentiment has prevailed in the automotive sector. Data for the previous year shows that the Polish automotive industry is

44 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011 pretty resistant to economic downturns and has slowly been regaining its balance. According to experts, this is primarily attributable to the specific production profile of Polish manufacturers, which are focused on making small, affordable cars. Another key factor was the situation in the automotive parts and subassemblies sector, where investments continue to grow. According to long-term forecasts, the European automotive market will gradually be breaking the deadlock in the coming years. According to the EIU5 data, in 2011 the decrease in the sales of new passenger cars in Europe should halt, and in 2012–2014 the number of new car registrations is expected to grow by 4–5% per annum. Thus, all indicates that, if no unpredictable slumps occur in the European or global economy, the Polish automotive industry will enter a period of stable growth. From the perspective of the Company's business activity (production of AdBlue®), of material importance are the legal regulations governing hazardous emissions from internal combustion engines. Such regulations include what is known as the Euro standards, which apply particularly to trucks. In this segment, the majority of manufacturers of vehicles and parts (Cummins, Mercedes, Volvo, Scania, MAN, IVECO and Ford) have confirmed the use of the SCR system, which requires the use of AdBlue®. Besides trucks, the Euro standards also apply to barges, inland and sea vessels, locomotives and agricultural machines. Their manufacturers make up another large segment of industrial customers for AdBlue®. In this area the use of the SCR system has also been confirmed – MAN Diesel & Turbo has developed a sea engine meeting the Tier III standards, Caterpillar uses the SCR system in its construction machinery, New Holland equips its new makes of harvesters with the system and AGCO applies the system in its new series of agricultural tractors. The SCR technology has also been successfully launched as far as passenger cars are concerned. Use of the technology has been confirmed by Mercedes, BMW, Volkswagen, Mazda, Audi and Jeep, which means that the customer base for AdBlue continues to grow. Consumption of AdBlue® in EU27 and EFTA countries reached 1.17m tonnes in 2010, compared with 1.03m tonnes in 2009.

Plastics sector

In the European plastics sector, the crisis ended earlier than expected, as shown by good performance recorded by companies operating in the sector. Representatives of the sector estimate that demand for plastics will be growing at a rate of above 5% annually and, relying on such a forecast, they have been increasing their companies' production capacities. For numerous products (e.g. biopolymers), much higher, even two-digit growth rates are forecast. It has also been strongly emphasised that the centre of global production has been moving to Asia and Central and Eastern Europe. In Asia, numerous plants are launched which able to manufacture products at low cost. European manufacturers competing with the Asian ones in terms of production cost are forced to move their production to the eastern part of Europe. Forecasts are currently the most optimistic with respect to modern technology plastics, such as biodegradable plastics, nanocomposites, polyamides or intrinsically conducting polymers. Lengthening the product chain through the addition of technologically advanced products provides an opportunity to boost sales thanks to offering high-margin products. Also the imminent implementation of ever more stringent regulations concerning reduction of flue gas emissions has been favouring the development of environment- friendly plastics.

Regulation in international fertiliser trading

Anti-dumping duties imposed earlier by the European Commission on imports to EU member states of urea- ammonium nitrate solution (UAN) from Algeria, Belarus, Russia and Ukraine, and ammonium nitrate from Russia and Ukraine, continued in effect during the reporting period. In March, the European Commission published information to the effect that the trade protection measures relating to UAN imports expire on December 22nd 2011.

The European Potash Producers Association (APEP) applied to the European Commission to uphold the limits on imports of sylvinite from Belarus and Russia subsequent to July 13th 2011. The limits have been in effect since 1992, however in 2006 Belarus was granted 750 thousand tonnes duty free quotas. The Association postulates that market protection should be continued at least until 2016. It is proposed that during that period the duty free quotas should be kept, while the remaining imports would carry a duty of 12.3–27.5%. In response, Russian silvinite producers filed an application with the European Commission, requesting a partial revision of the duty rate.

5 Economist Intelligence Unit, an organisation associated with The Economist weekly. 45 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

In China, export duty on urea was 110% in the period from December to June. In July this rate will be reduced to 7%. Also, the new export duty on diammonium phosphate (DAP) and monoammonium phosphate (MAP), effective in the period from June to September, will be 7% instead of 110%. The duty rate for triple superphosphate (TSP) has remained unchanged at 7%. As of May 2011, the American market is subject to a 253.98% anti-dumping duty imposed by the International Trade Administration on ammonium nitrate originating from Russia.

Regulation in international chemical products trading

Melamine

Following completion of anti-dumping proceedings, in mid-May 2011 the European Commission announced the imposition of a final customs duty on melamine imported from China, at 415 USD/t applicable to all but three manufacturers in the case of which a different instrument was applied (a minimum import price of 1,153 EUR/t CIF). These three manufacturers are: Sichuan Jade Elephant Melamine S&T Co Ltd, Shandong Lither Chemical Industry Co Ltd and Henan Junhua Development Company Ltd. The announced duty rates will remain in effect for the next five years.

Caprolactam

The anti-dumping proceedings in China concerning caprolactam imported from the EU and the US, which began in April 2010 and are expected to be concluded in October 2011, have not affected the buyers behaviour or their willingness to accept record high prices. On January 25th 2011, provisional duty rates were announced in China. Duties imposed on European manufacturers vary between 4.3% and 25.5% (in the case of ZA Puławy the duty is 15.5%), and between 6.6% to 24.2% in the case of American manufacturers.

Situation in the fertiliser markets

Poland

In the first quarter of the Company's financial year, demand for fertilizers decreases due to harvest time. Most producers use this period to carry out scheduled repair work in production units. At the end of August and in September, the demand for fertilizers increased. It was generated by distributors who started to buy fertilizers for storage, and by large agricultural entrepreneurs stocking up for the spring fertilizer application season. In September 2010, there was a significant increase in prices of mineral fertilizers, caused by the necessity to close the gap between domestic and European trends. Starting from that point until April 2011, the prices of mineral fertilizers were rising steadily. October, January and March saw the most dynamic price increases. In April, the growth of mineral fertilizer prices slightly decelerated relative to the first months of the calendar year. May and June, which close the fertilizer application season, have traditionally brought lower demand and correction of fertilizer prices, marking the beginning of a new fertilizer season.

Global market

In the period under review, new urea production capacities were launched. In September, a Russian fertilizer group launched a new urea production line, increasing its capacities to 3.2 thousand tonnes per day. This way the Russian plant became the largest urea producer in Europe, with a capacity of 4.4 thousand tonnes per day. Also, in October 2010, a manufacturer from Turkey resumed production of urea in a facility that was closed in 2008, reaching an annual capacity of 561 thousand tonnes.

During the discussed period, there were a number of stoppages in facilities manufacturing nitrogen fertilizers. In December 2010, a production plant in France reported a stoppage in ammonia and ammonium nitrate production lasting nearly two weeks and over three months respectively. Also, a facility in Libya, in which one of the fertilizer industry leaders holds interest, suspended production of ammonia and urea in February. In Europe, stoppages on the urea production lines occurred in April in Le Havre (France), for two weeks in Ferrara (Italy) and for several days in Sluiskil (the Netherlands). In the Sluiskil facility, ammonia production also stopped for approximately two weeks. During off-season months (May–June), several European fertilizer production plants had scheduled overhaul stoppages.

46 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

In the discussed period, the situation on the grains market, growing demand for nitrogen fertilizers and stoppages on production lines affected fertilizer prices, which were higher than in the previous fertilizer year.

The financial year 2010/2011, and especially its second half, saw strong activity as far as mergers and acquisitions are concerned. In the third quarter, K + S AG acquired Potash One Inc. on the American market, and J&H Bunn Ltd. along with its terminals was acquired by Koch Fertiliser Ltd. in Europe. A merger of key importance for the global potassium fertilisers market took place in the fourth quarter between OJSC Uralkali and OJSC Silvinit, two leading sylvinite producers, which annually supply over 10m tonnes of silvinite. A merger of OJSC Uralkali with JSC Belaruskali was also announced. If this merger is successful, the combined entity will hold a 30% share in the global sylvinite supply market.

Situation in the Company’s chemical products markets

Melamine

In the period under review, the situation in the global melamine market clearly improved on the back of a recovery in the wood industry and limited supply of melamine in Europe due to production problems faced manufacturers, as well as on the back of delays with the launch of new projects in Qatar and Trinidad. A strong growth in melamine consumption was the key factor justifying an uninterrupted increase of its price continuing until March 2011. Moreover, an important event which occurred in the period under analysis was the decision made by the European Commission in which the Commission took a favourable stance towards the application made by European melamine producers and initiated anti-dumping proceedings relating to melamine originating from China.

Caprolactam

The unflagging demand for caprolactam from the textile and construction plastics industries, chiefly in Europe and Asia, combined with production plant failures in several regions of the world, resulted in tightening of the market in the financial year 2010/2011, which gave way to record prices. Consumption was additionally stimulated by rising benzene prices, high prices of polyamide substitutes such as cotton and polyester, and the Chinese government's restrictions on imports of the PA-6 polyamide (a product of caprolactam processing). It should be noted that China remains a net importer of caprolactam, as its internal production cannot satisfy the Chinese market's demand. In 2009, caprolactam imports into China amounted to 600 thousand tonnes, in 2010 – 630 thousand tonnes, and is estimated to reach 650 thousand tonnes in 2011 , whereas China's local production capacity was 525 thousand tonnes and 585 thousand tonnes respectively in 2009 and 2010, and is anticipated at 595 thousand tonnes in 2011. Over the financial year 2010/2011, average contractual prices of flaked caprolactam in the Far East ranged from 2,200 USD/t to 3,600 USD/t (the highest price reported in March–April 2011).

AdBlue®

The AdBlue® market is still one of the developing markets. Its growth is stimulated by European laws on the reduction of flue gas emissions – the Euro 5 standard and the even more restrictive Euro 6 standard, which is to be introduced in 2013, as well as the implementation of the SCR system into new market sectors, such as agricultural machinery, vessels and industrial machinery. Registration, sale and commencement of use of vehicles not complying with this standard will be forbidden.

In the first quarter of 2011, sales in the European delivery vehicles market rose by 15% year on year (Greece and Ireland were the only countries which recoded decreases in the sales results, respectively of -62% and - 26%). In 2010, the number of newly registered trucks with the SCR system went up by 5% relative to 2009 (respectively 165 thousand and 157 thousand trucks).

The European network of AdBlue® distribution stations EU27+Norway+Russia+Serbia+Switzerland) is constantly developing. It currently comprises 3,759 dispensers, compared with 3,687 in January 2011 and 3,261 in April 2010. The network in Germany continues to be the most developed one (740 dispensers). In Poland,

47 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011 there are currently 92 dispensers, compared with 82 in January 2011 and 57 in April 2010. Growth of the AdBlue® market has not gone unnoticed by large retail chains. Tesco has added AdBlue® to the offering of products sold through service stations in UK, although so far this is only several dispensers in locations all over the country.

Hydrogen peroxide

During the entire 2010/2011 financial year, the European hydrogen peroxide market saw a substantial increase of demand. According to experts, by December 2010 its consumption was already 13-15% higher than a year earlier, mainly on the back of the economic recovery in those industries which purchase the largest quantities of hydrogen peroxide, such as the pulp and paper industry. The largest demand for hydrogen peroxide was observed in Northern Europe, and especially in Finland, where demand improved substantially. In the period under review, volumes of hydrogen peroxide exported from Europe to other parts of the global market also went up, due to increasing demand as well as a favourable exchange rate of the euro.

5. Projected financial standing

The Company’s financial standing should not change substantially over the next year. ZA Puławy, as any business, is exposed to various risks which, if they materialise, could affect its financial position. Major risks include potential reversal of the current growth trend in the global economy and uncertainties concerning the situation in the agricultural market, which is hugely dependent on unpredictable factors, such as weather conditions. When assessing the Company’s financial prospects, particular attention should be paid to the situation on the Chinese market, which is currently the most important market for the global chemical business. Additionally, the Company’s standing may be adversely impacted by factors specific to the local market, such as risk related to high volatility of the złoty exchange rate in relation to the main currencies and issues related to natural gas, such as its high prices or availability. Given the high degree of uncertainty inherent in those risks, it is impossible to provide a reliable assessment of their impact on the Company’s projected financial standing. However, considering its current financial position and available forecasts, the Company's financial situation should remain stable. There is no threat to implementation of ZA Puławy’s investment plans. The scope of planned investments and changes in the Company’s financial position in the future may result in changes in the Company's financing structure towards higher reliance on external financing.

6. Opportunities, threats and risks

Opportunities:

 Consistent implementation of the Company’s strategy;  EU mechanisms supporting the development of businesses;  A 5.6% increase in the consumption of nitrogen fertilisers in Poland by 2014/2015*;  A projected 6.3% increase in the consumption of nitrogen fertilisers in the 12 CEE members of the EU by the financial year 2014/2015*;  A projected 6% and 16% increase in the consumption of phosphorus fertilisers in the EU-27 and in the 12 CEE members of the EU, respectively, by the financial year 2014/2015*;  A 23% increase in the consumption of phosphorus fertilisers in Poland by the financial year 2014/2015*;  A projected 14% and 36% increase in the consumption of potassium fertilisers in the EU-27 and in the 12 CEE members of the EU, respectively, by the financial year 2014/2015*;  A 31% increase in the consumption of potassium fertilisers in Poland by the financial year 2014/2015*;  Direct subsidies – increase in farmers’ purchasing power, agricultural modernisation;  Production of biofuels in the US and in Europe;  Subsidies granted under the EU’s Common Agricultural Policy – development of rural areas;  Growing popularity of liquid fertilisers and greater awareness of their effectiveness;  Rapidly growing range of applications for the urea solutions (for instance AdBlue®) in the automotive and power industries;  An expected 5.6% increase in global demand for melamine, especially in China (around 8.1% increase), but also in Europe (around 3%) and in Central and Eastern Europe (over 7.8%);

48 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

 Growth rates for hydrogen peroxide consumption in Ukraine and Russia higher than the European average – the advantageous location of ZA Puławy gives it a competitive advantage;  EU legislation concerning flue gas emissions – Standards Euro 4 and 5, as well as Euro 6 (from 2013) – the standards can be met through the use of the SCR technology which relies on the use of AdBlue® ;  Expansion of polyamide manufacturers in China and Taiwan as a driver of demand for caprolactam.

Threats:

 Inclusion (from 2013) of the chemical sector into the EU Emissions Trading Scheme (ETS III);  Higher prices of commodities;  A 2.1% decrease in the consumption of nitrogen fertilisers (calculated on a pure-nitrogen basis) in the EU- 15 by the financial year 2014/2015*;

 Stringent legal regulations (such as REACH, ETS Phase III – limits on the emissions of NO2, CO2 and SO2);  Sensitivity of the fertiliser industry to economic cycles;  Potential restrictions in trading in ammonium nitrate within the EU which may be introduced by the European Parliament and the Council;  Strong competition among the manufacturers of melamine (new investment projects);  Over the next two or three years, launch of caprolactam production installations in China with a total production capacity of 600 thousand tonnes per year;  Differences in the prices paid for natural gas by fertiliser manufacturers in Poland and those in other countries;  Unreliability of natural gas supplies and limitations in the production of fertilisers and chemicals;  New investment projects (melamine, nitrogen fertilisers) in the areas where cheap natural gas is available;  Potentially higher imports into Poland of nitrogen fertilisers from countries where cheaper natural gas is available, production capacities are high and domestic demand remains low;  Imposition of excise duty on natural gas purchases;  Worsening financial standing of the end users of the Company’s products;  Change in bleaching technology – the paper industry gradually discontinuing the use hydrogen peroxide as a bleaching agent to the benefit of other chemicals;  Closing down of, or transfer of production from, non-profitable Scandinavian paper mills to South America and Russia;  European Commission’s regulations concerning carbon leakage (transfer of production to countries not subject to emission limits).

* according to EFMA’s forecasts

Risks

ZA Puławy and other entities involved in the production of and trade in chemical products and fertilisers are exposed to a number of risks and threats, both external (connected with the legal and market environments) and internal (connected with the nature of a company’s operations). In order to manage risks in a regular and organised way, the Management Board of ZA Puławy has developed procedures and implemented organisational solutions that make up the Company’s risk management system. The risk management model adopted at the Company includes: setting of objectives for a defined time horizon, risk identification and quantification, arrangement of preventive measures, assignment of responsibility for the management of particular risks, periodic risk review and monitoring of the efficiency of the implemented solutions. To support the risk management process, a strategic risk map has been developed, which is reviewed by the Management Board on a semi-annual basis. Risk quantification is based on quantitative and qualitative criteria, whose scope is defined by the Management Board, in line with the adopted economic and financial assumptions. Risk identification process covers events which might expose the Company to a loss and missed opportunities to increase benefits. Risk hierarchy (materiality) is determined based on the event occurrence probability, the impact of an event on the meeting of targets, as well as the efficiency of control mechanisms and means (control system) used in a given area. The model of the Map of Strategic Risks implemented at ZA Puławy is presented below.

49 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Map of Strategic Risks

Impact

Catastrophic

Critical

Serious

Material

Immaterial

Remote Low Medium High Almost certain

Probability

Below are presented those risks which have been identified as the most important (along with a description of preventive measures).

Risk related to changes in regulations concerning pollution prevention and control

The technological processes applied by the Company result in emissions of sulphur dioxide, carbon dioxide, nitric oxides and dust into the atmosphere. Emissions are subject to stringent legal regulations deriving from the European Union’s principles adopted with respect to reduction of greenhouse gas emissions. The European Parliament and the Council approved new solutions concerning reduction of emissions under Directive 2010/75/EU concerning industrial emissions (IED). Once the Directive is implemented in Poland and the so- called BAT conclusions are issued at the EU level, new, much stricter pollutant emission standards will be introduced. Work is also under way in the European Union on legal regulations concerning trading in allowances for greenhouse gas emissions released in the process of generation of electricity and heat and in selected industrial activities. In order to obtain an allowances trading licence, the Company has notified to the Emissions Trading Scheme its installations which are subject to emission regulations. Regulations of the third phase of the EU Emissions Trading Scheme (EU-ETS III) will start to apply between 2013 and 2020. Implementation of solutions proposed by the European Commission Directorate-General for Climate Action (approved in a vote by the Climate Change Committee composed of representatives of the EU member states) will also significantly contribute to an increase in charges relating to CO₂ emissions. As part of the work of Fertilizers Europe, CO₂ Forum and the Polish Chamber of Chemical Industry, as well as in cooperation with the Ministry of Economy, the representatives of ZA Puławy make intensive efforts the purpose of which is designing appropriate legislative provisions to reduce the adverse effects of implementation of the third phase of trading in emission allowances. Moreover, active steps are taken to emphasise the significance of the implemented solutions for future operations of industry in Poland and the European Union following the introduction of unfavourable regulations under EU-ETS III. These include:  appearance of the Company’s representatives in opinion-making TV programmes (TVN CNBC) and statements for the press;  lobbying activities aimed to foster the adoption of favourable legislative solutions (appeal to the European Court of Justice against the European Commission’s decision concerning the calculation of free-of-charge CO₂ emission allowances);  the Company’s active participation in the work of FE, CO₂ Forum, and PIPCH. In order to reduce the emission of pollutants and greenhouse gases, the Company has been implementing or intends to implement investment projects aimed at:  - reducing nitric oxide emissions through: - reduction of NOx generated by the CHP plant by way of using a urea solution (non-selective catalytic reduction method); - reduction of NOx through the use of the selective catalytic reduction method (SCR);  - reducing sulphur dioxide emissions through: 50 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

- implementation of an investment project named “Construction of a Flue Gas Desulphurisation Unit Using the Wet Ammonia Method in ZA Puławy”; - burning coal with a low sulphur content until the flue gas desulphurisation unit is launched;  - reducing carbon dioxide emissions through: - implementation of investment projects involving alteration of the unit for carbon dioxide removal from gas in the ammonia synthesis process on three gas preparation lines. Reduction of dust emissions has been achieved through:  modernisation of Steam Boiler No. 2, which has reduced flue gas emissions to less than 50 mg per cubic metre; the pro-environmental effect has been confirmed by the Provincial Inspectorate for Environmental Protection;  achievement of pro-environmental objectives of the Modernisation of Electrostatic Precipitators project. The Company’s Management Board is making consistent efforts with a view to implementing the Puławy Power Plant investment project. Assuming that natural gas is used as a fuel, implementation of this project will ensure a reduction of emissions and related charges by approximately 50%.

Risk related to increased competition on nitrogen fertiliser markets

Continued consolidation of the fertilisers distribution market in Poland, increasing supply of fertilisers manufactured with the use of cheap gas, and growing production capacity in the fertilizer industry have all been contributing to enhanced competition in the nitrogen fertiliser markets. In order to strengthen and consolidate the Company’s leadership in nitrogen fertilisers production and sales, the Company’s Management Board has been taking steps to optimise the production costs and broaden the portfolio of products and services offered. Measures taken by the Company to enhance its competitive advantage include:  pursuance of the Company’s updated strategy for 2011–2017 in respect of distribution;  continued implementation of cost saving projects as part of the 10-15-20 Cost Reduction Programme;  execution of investment projects to improve production efficiency;  integration with Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o.;  searching for alternative sources of natural gas;  strengthening of the Company’s market position through active involvement in the process of consolidation of the chemical sector (acquisitions);  anti-dumping initiatives;  active participation in the work of Fertilizers Europe;  cooperation with universities (Warsaw University of Life Sciences, University of Puławy, Maria Curie- Skłodowska University of Lublin, Warsaw University of Technology) and research centres (e.g. Institute of Soil Science and Plant Cultivation, Fertilizer Research Institute).

Risk related to high purchase prices of natural gas and electricity

The purchase price of natural gas is the main component of the production cost at ZA Puławy. In the financial year 2010/2011, the item represented approximately 50% of the Company's costs. On March 3rd 2011, an annex was signed to the Agreement on Purchase of High-Methane Natural Gas, concluded with PGNiG S.A. on January 14th 1999. The estimated value of the Agreement in 2011 is PLN 990m. Thanks to the execution of the Annex, the Company can purchase larger volumes of gaseous fuel and increase contracted capacity relative to previous years, as required in connection with the launch of new production capacities and higher volumes of fertilisers produced. Purchasing larger volumes of gaseous fuel will also allow the Company to carry out an upgrade of the measurement system (scheduled for July 16th–August 18th 2011). Because of high natural gas prices (in the financial year 2010/2011, the Company paid about 9.7 USD/MMBtu, compared with the average European price of 9.29 USD/MMBtu, the price of natural gas in the USA (4.16 USD/MMBtu), and in Russia (2-3 USD/MMBtu), the Company undertakes investment projects designed to reduce its gas consumption. At present, ZA Puławy is looking for supply sources other than PGNiG S.A. to provide additional volumes of natural gas, for example by participating in Open Season procedures to obtain spare transmission capacities on the points of entry to the Polish transmission system and purchase gas abroad. Another material factor which affects natural gas purchase price is fixed costs, comprising the charge for the contracted transmission capacity, which is payable irrespective of the actual amount of gas transmitted to the Company.

51 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

In the near future, the Company expects to renew negotiations with PGNiG S.A. in order to introduce changes to its comprehensive agreement and adjust its provisions to ensure compliance with the amended Transmission Grid Code. In the financial year 2010/2011, cost of electricity purchased represented 12% of the Company's costs. The Company purchases electricity under agreements with electricity suppliers, selected chiefly by means of a tender procedure, though some of the electricity is also purchased on the spot market. Implementation of the Puławy Power Plant Project will significantly reduce some of the charges related to transmission of electricity to ZA Puławy. While the Company has no control over the price of purchased natural gas, including its transmission, or the price of electricity transmission, it does take steps to mitigate the effects of increases in these cost items through active involvement in the work on development of legislative solutions applicable to gas and electricity trading. The Company’s representatives actively participate in the work of committees/ working teams set up based on the initiative of the Ministry of Economy, Ministry of State Treasury, Polish Chamber of Chemical Industry and non-governmental organisations. The Company is having an energy audit carried out, in order to identify its energy needs and optimise its power consumption.

Risk related to the implementation of investment projects

All investment projects are executed under an approved General Prospective Plan and Property, Plant and Equipment Under Development Plan, which is reviewed periodically. In order to mitigate the risk connected with the investment decision-making process, ZA Puławy has implemented internal policies which clearly define and regulate the preparation, implementation and controlling of investment projects. These policies 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. To obtain reasonable assurance that investment projects are being executed in line with the adopted assumptions and that they will provide permanent effects, projects are subject to operational audits covering their cost effectiveness, efficiency and effectiveness of the actions performed, as well as to legal and financial audits.

Risk of serious industrial failure

In the course of its operations, ZA Puławy handles large quantities of hazardous chemical substances, which poses a threat of a fire, explosion or release of toxic substances. ZA Puławy is committed to achieving high standards of security and environmental protection. For a number of years the Company has been taking organisational and technical measures designed to mitigate the risks inherent in its operations. In accordance with the provisions of the Natural Environment Protection Law, the Company holds the required documentation, including in particular:  notification of a plant with a high risk of a serious industrial failure;  security report on ZA Puławy;  programme to prevent serious industrial failures, including a description of a security system;  internal rescue operation plan. The Company has also submitted information necessary to develop an external rescue operation plan. The Company maintains forces and measures necessary to carry out rescue operations, such as the Company Fire Brigade and chemical rescue teams situated in production units. Drills are conducted on a regular basis to test the teams' readiness to carry out procedures defined in the internal and external rescue operation plan. ZA Puławy has implemented an Integrated Quality Management, Environmental Management, and Safety Management System.

Risk of potential limitations in gas supply

One of the key semi-products used at ZA Puławy is ammonia, which is obtained from natural gas. The exclusive provider of natural gas to the Company is PGNiG S.A. The Company has been developing scenarios and taking steps to mitigate any effects of potential limitations in gas supply. These include:  purchases of ammonia as an alternative solution to minimise the effect of gas supply disruptions;  implementation the Construction of Ammonia Storage and Distribution Facilities investment project, designed to increase ammonia storage capacity and improve the flexibility of management of the ammonia stock;  search for alternative solutions (outside the existing sales system) with respect to natural gas supplies; 52 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

 implementation of procedures to be followed in the case of limitations in supply of natural gas;  in the future, use in the production process of synthesis gas from coal gasification (if the project proves to be economically viable for the Company);  capturing any gas supply diversification opportunities following from improvements in economic viability of shale gas production. ZA Puławy is a member of the Chamber of the Natural Gas Industry and the Polish Chamber of Chemical Industry. Through these institutions, the Company takes active part in preparation of amendments to the Polish Energy Law, compiling the Polish Gas Law and introduction of amendments to the Polish Act on Stocks of Crude Oil, Petroleum Products and Natural Gas, as well as on the Rules to be Followed in the Event of a Threat to National Fuel Security or a Disruption on the Petroleum Market.

Risk of exchange rates volatility

ZA Puławy sells its products both on the domestic market and abroad. The Company generates revenue denominated in foreign currencies from sales of its products but, at the same time, it incurs expenditure denominated in foreign currencies. Furthermore, a part of the income and expenses is denominated in foreign currencies. Because the foreign currency and the foreign-currency expressed cash inflows and outflows do not set off each other, the Company is exposed to the risk of adverse movements in foreign exchange rates. To mitigate this risk, the Company actively hedges its cash flows against currency risk based on the internal policies governing currency risk management. Such policies define a list of acceptable and approved instruments, a financial planning process for the purposes of currency risk management, and hedging limits depending on the time horizon of transactions. For the purposes of currency risk management, scenario analyses and stress tests are performed. An IT tool has been implemented to support currency risk management.

Risk of inefficient implementation of the Company's updated strategy

The global and Polish economies have recently undergone changes which directly affect the business conducted by ZA Puławy, and the Company has identified the following circumstances prompting it to update its strategy:  the economic crisis, particularly severe for the chemicals and fertilisers industry;  continued consolidation of the fertilisers distribution market in Poland;  relatively high prices of gas, which is the Company's key feedstock;  in the short-term, lack of viable prospects for purchasing gas from other sources;  increasing fertiliser imports into Poland;  growing production capacity of ZA Puławy;  global trends concerning the development new business models in the fertilizer industry;  mergers and acquisitions in the chemical industry in Poland and abroad. The Management Board of the Company approved a document entitled “ZA Puławy’s Updated Strategy for Fertilizer Distribution for 2011-2017”. The Updated Strategy is a result of several new comparative analyses of ZA Puławy against its international and domestic competitors, made taking into consideration key changes occurring on the international chemicals and fertilizer market. On the basis of the performed analyses, the Company has identified new strategic directions for each of its business areas and a logical framework matrix for its operational objectives. The Company is aware of the crucial importance of the Polish market and the end users (agricultural entrepreneurs) to its fertilizer distribution business. Therefore, the Updated Strategy emphasises the necessity to introduce changes into organisational models concerning support for end users of fertilizers manufactured by the Company. In order to successfully implement ZA Puławy's Updated Strategy for Fertilizer Distribution for 2011-2017, the Company will use a Balanced Scorecard performance management tool.

7. Management and supervisory staff

The Company’s management and supervisory staff are appointed in accordance with the rules defined in the Act on Commercialisation and Privatisation of State-Owned Enterprises of August 30th 1996 (Dz.U. of 2002, No. 171, item 1397, as amended) and in the Company's Articles of Association.

53 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Management Board

Composition of the Management Board as at June 30th 2011: Name Position Paweł Jarczewski President of the Management Board Marian Rybak Vice-President of the Management Board Marek Kapłucha Member of the Management Board Andrzej Kopeć Member of the Management Board Wojciech Kozak Member of the Management Board Zenon Pokojski Member of the Management Board There were no changes in the composition of the Management Board in the reporting period.

Commercial proxies Name Position Anna Gol Commercial proxy Hubert Kamola Commercial proxy

Agreements between the Company and its management staff providing for compensation in the event of a given person resigning or being removed from office without a good reason, or being removed as a result of the Company being merged into another company

Employment contract A Management Board member is entitled to severance pay equal to three times the monthly salary in the event of his or her removal from office of a member of the Management Board and termination of his or her employment contract for reasons other than violation of the principal duties under the employment contract.

Non-compete agreement A member of the Management Board is subject to limitations regarding engagement in competitive activities and membership in the governing bodies of other entities, pursuant to the Commercial Companies Code and other generally applicable laws and regulations. The limitations are effective for the duration of the employment relation and for six months following its termination. The Company pays compensation to employees in respect of the obligation to refrain from any competitive activities for six months from the date on which their employment contract is terminated. In the event of violation of the non-compete obligation or lack of employee’s representation on compliance with the obligation, the employee loses the right to receive compensation and is required to return any amounts received as compensation. A Management Board member who is removed from office and agrees to be employed by the Company or its related entity may be released from the non-compete obligation by the new employer.

Supervisory Board

Composition of the Supervisory Board as at July 1st 2010: Name Position Cezary Możeński Chairperson of the Supervisory Board Irena Ożóg Deputy Chairperson of the Supervisory Board, Independent Member of the Supervisory Board Jacek Wójtowicz Secretary of the Supervisory Board Mirosław Kugiel Member of the Supervisory Board Marta Kulik-Zawadzka Member of the Supervisory Board Jan Nowicki Member of the Supervisory Board

As the term of office of ZA Puławy S.A.’s Supervisory Board was nearing its end (the date of the Annual General Shareholders Meeting approving the Company’s 2009/2010 financial statements), on October 4th 2010 the Supervisory Board adopted Resolution No. 341/VI/2010 ordering an election of candidates for Supervisory Board members elected by the Company’s employees, effective as of October 11th 2010. Following two rounds of elections, two candidates were nominated by the employees: Mr Andrzej Bartuzi and Mr Jacek Wójtowicz. 54 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

On December 16th 2010, the Annual General Shareholders Meeting of ZA Puławy S.A. granted discharge to all the Supervisory Board members in respect of their performance of duties in the period from July 1st 2009 to June 30th 2010, and appointed the following persons to the Supervisory Board of the next joint term of office (commencing as of the date of the appointing resolutions): - Andrzej Bartuzi – elected by the Company’s employees - Jacek Wójtowicz – elected by the Company’s employees - Jacek Korski - Marta Kulik-Zawadzka - Cezary Możeński - Irena Ożóg – independent member At its first meeting held on December 27th 2010, the new Supervisory Board formally constituted itself as follows: - Cezary Możeński – Chairperson of the Supervisory Board - Irena Ożóg – Deputy Chairperson of the Supervisory Board - Jacek Wójtowicz – Secretary of the Supervisory Board - Marta Kulik-Zawadzka – Member of the Supervisory Board - Jacek Korski – Member of the Supervisory Board - Andrzej Bartuzi – Member of the Supervisory Board Continuing the practice adopted by the Supervisory Board of the previous term of office, by virtue of Resolution No. 4/VII/2010 of December 27th 2010, the Supervisory Board appointed an Audit Committee composed of the following four persons: - Marta Kulik-Zawadzka - Irena Ożóg - Deputy Chairperson of the Supervisory Board, meeting the independence criteria and qualified in finance and accounting - Jacek Wójtowicz - Andrzej Bartuzi The Audit Committee unanimously elected Mr Andrzej Bartuzi as its Chairperson. Until the end of the financial year, the composition of the Supervisory Board and the Audit Committee remained unchanged.

Composition of the Supervisory Board as at June 30th 2011: Name Position Cezary Możeński Chairperson of the Supervisory Board Irena Ożóg Deputy Chairperson of the Supervisory Board, Independent Member of the Supervisory Board Jacek Wójtowicz Secretary of the Supervisory Board Marta Kulik‐Zawadzka Member of the Supervisory Board Jacek Korski Member of the Supervisory Board Andrzej Bartuzi Member of the Supervisory Board

55 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Changes in the number of ZA Puławy shares or rights to such shares held by the management and supervisory staff as at June 30th 2011

Number of shares held as at the date of release Number of shares held Acquisition Disposal of the report for Q3 as at Jun 30 2011 Management and supervisory 2010/2011 staff as at June 30th 2011 Number Par value Number Par value Number Par value Number Par value of shares of shares of shares of shares of shares of shares of shares of shares

Member of management staff 195 1,950 0 0 0 0 195 1,950 Member of management staff 547 5,470 0 0 0 0 547 5,470 Member of management staff 0 0 0 0 0 0 0 0 Member of management staff 0 0 0 0 0 0 0 0 Member of management staff 0 0 0 0 0 0 0 0 Member of management staff 0 0 0 0 0 0 0 0 Member of management staff 0 0 0 0 0 0 0 0 Member of management staff 0 0 0 0 0 0 0 0 Member of supervisory staff 824 8,240 0 0 0 0 824 8,240 Member of supervisory staff 0 0 0 0 0 0 0 0 Member of supervisory staff 0 0 0 0 0 0 0 0 Member of supervisory staff 0 0 0 0 0 0 0 0 Member of supervisory staff 0 0 0 0 0 0 0 0 Member of supervisory staff 0 0 0 0 0 0 0 0

Information on remuneration, awards and bonuses paid, due or potentially due to the management and supervisory staff is included in Note 39.3 to the financial statements.

8. Other information

Management Board’s position on the feasibility of meeting previously published financial forecasts

The Management Board of ZA Puławy had not published any forecasts for the financial year 2010/2011.

Significant agreements

 On July 8th 2010, ZA Puławy and FRITZ EGGER GmbH & Co signed a melamine sales agreement. Under the agreement, the Company undertook to supply, and Fritz Egger GmbH & Co undertook to collect, melamine in such quantities and with such technical characteristics as defined in the agreement. Due to the fact that the quantities and prices are negotiated and agreed on a quarterly basis, only an estimated value of the agreement may be given. Currently it is estimated at PLN 320m, which exceeds 10% of the Company’s equity. The agreement was concluded for a definite period until June 30th 2014 (Current Report No. 28/2010).  On August 30th 2010, ZA Puławy provided a notice of termination of the Agreement on the Sale of Electricity and Provision of Transmission Services, entered into with PGE Lubelskie Zakłady Energetyczne S.A. on December 20th 1999, in the part relating to the purchase of electricity. This significant agreement was terminated with effect as of December 31st 2010. In the part relating to the provision of transmission services to the Company, the agreement had terminated with effect as of April 1st 2010, in connection with the entry into force of the Agreement with PSE - Operator S.A. As a consequence of the foregoing, the Company is now a party to separate contracts for electricity purchase and electricity transmission services. This solution conforms with the electricity purchasing model adopted by the Company. The change in its approach to power procurement enables the Company to take advantage of various forms of electricity purchase, and thus to flexibly adapt to the prevailing market conditions (Current Report No. 29/2010).  On February 4th 2010, ZA Puławy signed a Long-Term Power Coal Purchase Agreement with Kompania Węglowa S.A. The agreement provides for the sale of power coal to ZA Puławy and expires on December 31st 2013. In the first year of the agreement, the prices set forth therein will apply to the individual quality grades of coal determined on the basis of its calorific value and sulphur content. The prices in the second and third year will be equal to the previous year's prices adjusted by an index calculated using data on price changes published by the Polish Central Statistics Office. The estimated value of the

56 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

agreement with respect to the basic contracted volume will fall in the range from PLN 157m to PLN 173m, depending on the coal quality. The upper limit of the estimated value range exceeds 10% of the Company’s equity. The agreement contains the following contractual penalty provision: The party responsible for the failure to deliver the basic contracted volume of coal shall pay to the other party a contractual penalty equal to 20% of the net value of undelivered or uncollected coal or 10% of the net value of undelivered or uncollected coal in the case of any additional volumes that may be contracted based on a supplementary arrangement made under the agreement. The parties may waive their rights to charge contractual penalties. If the damage exceeds the amount of contractual penalties, the parties may seek compensation in excess of the contractual penalties on general terms. Each party may be relieved from the obligation to pay contractual penalties if it proves that the improper performance of the agreement was caused by force majeure (Current Report No. 3/2011).  On March 3rd 2010, an annex was signed to the Agreement on Purchase of High-Methane Natural Gas, entered into with PGNiG S.A. on January 14th 1999 for an indefinite term. The agreement provides for sale and supply of specific volumes of natural gas by PGNiG S.A. The volumes and contracted capacity are agreed by the parties separately for each calendar year. The Annex of March 3rd 2011 provided the Company with the possibility to purchase larger volumes of gaseous fuel and increase contracted capacity relative to previous years, as required in connection with the launch of new production capacities. In 2011, the value of the agreement is estimated at PLN 990m (VAT exclusive), which is more than 10% of the Company's equity (significant agreement). Such agreement value has been estimated on the basis of the capacity and gas volumes contracted under the Annex and the prices and rates set out in the gaseous fuel tariff currently in effect. The Annex provided for: 1. An increase of the contracted capacity in the case of gaseous fuel supplied on a continuous basis (continuous contracted capacity) and provision of additional capacity supplied on an intermittent basis (intermittent contracted capacity), which is a new element added to the agreement; 2. A procedure for submitting annual and weekly declarations and re-declarations, which permits greater flexibility in ordering gas volumes depending on the Company's production requirements; 3. New rules governing the Company's settlements with the supplier in the event of a failure to collect ordered minimum volumes: a) replacement of the minimum monthly volume (MinMV) with the minimum annual volume (MinAV), b) a mechanism of the Company's liability based a contractual penalty for its failure to collect the minimum annual volume (MinAV), which depends on the amount of uncollected gaseous fuel; 4. A contractual penalty, in connection with the supplies of gaseous fuel on an intermittent basis, for failure to comply with any introduced limitations on the intermittent contracted capacity, which follows from the Gaseous Fuel Transmission Tariff of OGP GAZ-SYSTEM S.A.

The amendments introduced by the Annex came into effect as of January 1st 2011 (Current Report No. 6/2011).  On December 16th 2010, a conditional agreement was concluded between Ciech S.A., as the seller, and ZA Puławy S.A., as the buyer, for the sale of shares in Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. o.o. On April 27th 2011, the conditions precedent provided for under the conditional agreement were fulfilled. As a result, on April 27th 2011, ZA Puławy acquired assets in the form of 51,855 shares in GZNF Fosfory Sp. z o.o. with a par value of PLN 500 per share, representing 89.46% of the share capital of GZNF Fosfory Sp. z o.o. and conferring the right to 89.46% of the total vote at the General Shareholders Meeting of GZNF Fosfory Sp. z o.o. As at April 27th 2011, the carrying value of the acquired shares in ZA Puławy's accounting records was equal to their acquisition cost and amounted to PLN 107.24m (Current Report No. 42/2010 and Current Report No. 10/2011).

Progress of specific tasks assigned to the Company by the General Shareholders Meeting or reasons for their non-performance

Resolution No. 4 of the Extraordinary General Shareholders Meeting, dated March 7th 2011, on approval of acquisition of shares in another company (Notary Deed Rep. A No. 1890/2011 of March 7th 2011)

Performance: On April 27th 2011, ZA Puławy acquired a controlling stake in GZNF Fosfory Sp. z o.o. from the Ciech Group. The transaction confirms that ZA Puławy is consistently pursuing its business strategy, which features diversification of the product portfolio and increasing the business scale through mergers and acquisitions.

57 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Resolution No. 5 of the Extraordinary General Shareholders Meeting, dated March 7th 2011, on amendments to the Articles of Association of ZA Puławy (Notary Deed Rep. A No. 1890/2011 of March 7th 2011)

Performance: Amendments to the Articles of Association are pending consideration by the District Court for Lublin – Wschód.

External inspections carried out at ZA Puławy in July 1st 2010–June 30th 2011

In the period July 1st 2010 – June 30th 2011, external inspection authorities carried out a total of 58 inspections at ZA Puławy (72 in 2009/2010), including 34 (41 in 2009/2010) sanitary inspections conducted by the County Chief Sanitary Inspector of Puławy. The authorities carrying out the inspections included:  State Labour Inspection Authority – Regional Labour Inspectorate of Lublin – four inspections;  State Labour Inspection Authority – Regional Labour Inspectorate of Rzeszów – one inspection;  Lublin Customs Office – two inspections;  Lublin Tax Office – three inspections;  County Fire Authority Headquarters in Puławy – seven inspections;  National Atomic Energy Agency, Department for Supervision of Ionizing Radiation Application of Warsaw – one inspection;  Marshal Office of the Lublin Province, Department of Environment and Agriculture – one inspection,  National Fund for Environmental Protection and Water Management of Warsaw, Public Procurement Control Department – two inspections;  Starachowice Special Economic Zone – one inspection;  President of the Energy Regulatory Office – one inspection;  Lublin Provincial Inspector for Environmental Protection – one inspection;  County Chief Sanitary Inspector in Puławy – 34 inspections.

Upon completion of the inspections, three applications (eight in 2009/2010), one order (one in 2009/2010), and three decisions (23 in 2009/2010), including two by the County Chief Sanitary Inspector (15 in 2009/2010), as well as one post-inspection order (none in 2009/2010) were issued with respect to the Company. All the post-inspection instructions have been complied with by the Company within the prescribed timeframes. In the financial year 2010/2011, external inspection authorities did not issue any post-inspection instructions which would have a material effect on the economic situation of ZA Puławy.

Court proceedings

As at June 30th 2011, ZA Puławy was a party to proceedings whose aggregate value was lower than 10% of the Company’s equity. As at June 30th 2011, the Company was involved in:  nine cases in which ZA Puławy was the petitioner or appellant, with a total litigation value of PLN 0.49m;  43 enforcement procedures with the total value of PLN 14.09m, including principal of PLN 5.15m, interest of PLN 8.60m and litigation costs of PLN 0.33m;  14 bankruptcy proceedings where claims lodged in bankruptcy proceedings totalled PLN 1.5m, including principal of PLN 1.09m, interest of PLN 0.37m and litigation costs of PLN 0.05m (payments totalling PLN 0.76m were made during the proceedings in respect of the cases), and three proceedings where claims lodged totalled EUR 0.16m;  ten cases before the Labour and Social Security Court, including three cases for reinstatement to work, one case for the award of compensation of PLN 0.02m for a work accident which took place in 1969, four cases for the award of compensation and remedy in the total amount of PLN 0.43m, one case for refunding due remuneration, and one conciliation proceeding for the refund of deducted remuneration;  one case for the payment of interest to ZA Puławy accrued on the refunded VAT overcharge. The Supreme Administrative Court reversed the decision and remanded the case for re-examination, as a result of which the Provincial Administrative Court of Lublin overruled the challenged decision on May 24th 2011;  two cases brought before the Provincial Administrative Court, including one case concerning a complaint against the decision of the Polish Financial Supervision Authority to impose a PLN 0.15m penalty on ZA

58 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Puławy, and one case concerning a complaint against the decision of the Ministry of Finance regarding interpretation of laws applicable to corporate income tax.

Related-party transactions

Significant transactions executed by ZA Puławy or its subsidiaries with related parties in the financial year 2010/2011 were concluded at arms’ length. Financial highlights of ZA Puławy’s related undertakings for the period July 1st 2010 – June 30th 2011 (the related undertakings’ financial year coincides with the calendar year). The financial data of the GZNF Fosfory Group presented below relate to the period from April 28th 2011 to June 30th 2011:

Net Assets Equity No. Name Sales revenue profit/(loss) (Jun 30 2011) (Jun 30 2011) Subsidiary undertakings 1. GZNF Fosfory Group 61,115.0 2,480.0 283,533.0 112,245.0 2. Dom Wczasowy Jawor Sp. z o.o. 1,891.7 (99.1) 3,648.2 3,519.1 3. Melamina III Sp. z o.o. 0 (29.7) 126.7 112.9 4. Zakład Opieki Zdrowotnej Medical 5,765.5 258.9 3,118.4 2,265.9 Sp. z o.o. 5. Przedsiębiorstwo Projektowania Modernizacji i Rozwoju Z.A. PUŁAWY S.A. 11,381.5 824.7 8,861.3 4,741.0 PROZAP Sp. z o.o. 6. Przedsiębiorstwo Wykonawstwa 47,787.5 1,458.2 31,152.9 13,347.3 Remontów i Inwestycji Remzap Sp. z o.o. 7. Przedsiębiorstwo Żywienia Zbiorowego i 8,582.4 81.0 2,950.0 2,060.0 Usług Sto-zap Sp. z o.o. Associated undertakings 1. Bałtycka Baza Masowa Sp. z o.o. 11,575.3 4,695.8 40,405.8 25,153.4 2. Navitrans Sp z o.o. 6,391.8 234.0 1,062.3 543.7 3. CTL Kolzap Sp. z o.o. 24,937.3 2,510.9 15,505.4 8,852.6

Key financial ratios of ZA Puławy’s related undertakings: Return on Return on Net margin No. Name assets equity Quick ratio (%) (%) (%) Subsidiary undertakings 1. GZNF Fosfory Group 4.1 0.9 2.2 1.9 2. Dom Wczasowy Jawor Sp. z o.o. -5.2 -2.7 -2.8 6.1 3. Melamina III Sp. z o.o. - -23.4 -26.3 - 4. Zakład Opieki Zdrowotnej Medical 4.5 8.3 11.4 1.6 Sp. z o.o. 5. Przedsiębiorstwo Projektowania Modernizacji i Rozwoju Z.A. PUŁAWY S.A. 7.2 9.3 17.4 2.2 PROZAP Sp. z o.o. 6. Przedsiębiorstwo Wykonawstwa 3.1 4.7 10.9 1.2 Remontów i Inwestycji Remzap Sp. z o.o. 7. Przedsiębiorstwo Żywienia Zbiorowego i Usług 0.9 2.7 3.9 2.3 Sto-zap Sp. z o.o. Associated undertakings 1. Bałtycka Baza Masowa Sp. z o.o. 40.6 11.6 18.7 1.8 2. Navitrans Sp z o.o. 3.7 22.0 43.0 2.2 3. CTL Kolzap Sp. z o.o. 10.1 16.2 28.4 1.8

For details on related-party transactions, see Note 39 in the financial statements.

Auditor of the Company’s financial statements

For details of the auditor of the Company’s financial statements, see Note 46 to the financial statements. 59 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Management Board’s statement

We hereby represent that the Directors’ Report on the operations of ZA Puławy in the financial year 2010/2011 gives a fair view of the Company’s development, achievements and standing, as well as of the threats and risks affecting the Company.

60 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Appendix 1

Statement of Compliance with Corporate Governance Principles

Pursuant to Par. 91.5.4 of the Regulation of the Minister of Finance concerning current and periodic information to be published by issuers of securities and the conditions for recognition as equivalent of the information whose disclosure is required under the laws of a non-member state (the “Regulation”), dated February 19th 2009, the Management Board of ZA Puławy (the “Issuer” or the “Company”) hereby publishes its statement of compliance with corporate governance principles.

1. The corporate governance code applicable to the Issuer and the place where the text of the code is publicly available In the financial year 2010/2011, ZA Puławy complied with the set of corporate governance principles laid down in the “Code of Best Practice for WSE Listed Companies”, attached as Appendix to Resolution No. 17/1249/2010 of the WSE Supervisory Board, dated May 19th 2010. The text of the code is publicly available on the Issuer’s website (www.zapulawy.pl) in the Investor relations/Corporate Governance section and also on the Warsaw Stock Exchange’s corporate governance website at www.corp-gov.gpw.pl.

2. Identification of the corporate governance principles referred to in Section 1 which were not applied by the Issuer, along with a statement of reasons for not applying a given principle In the financial year 2010/2011, the Company did not comply with the following corporate governance principles defined in the Code of Best Practice: 1. Recommendations for best practice for listed companies – Principle 1; 2. Recommendations for best practice for listed companies – Principle 5; 3. Recommendations for best practice for listed companies – Principle 9; 4. Best practice for Supervisory Board members – Principle 8.

Recommendations for best practice for listed companies – Principle 1 Companies should pursue a transparent and effective information policy using both traditional methods as well as modern technologies ensuring fast, secure and broad access to information. Using such communication methods to the broadest extent possible, companies should ensure adequate communication with investors and analysts, enable on-line broadcasts of general shareholders meetings over the Internet, record general shareholders meetings and publish the recordings on their websites.

The Company used various communication methods to pursue a transparent and effective information policy that ensures a fast and secure access to information for shareholders, analysts and investors. However, in the reporting period the Company decided not to broadcast general shareholders meetings over the Internet or record them and publish the recordings on its website, as recommended in the Code of Best Practice. The Company believes that it pursues a transparent information policy with respect to general shareholders meetings as it meets all disclosure requirements set out in the Regulation of the Minister of Finance on current and periodic information to be published by issuers of securities. In order to provide more effective access to information, the Company is at an advanced stage in developing a more functional and transparent website equipped with modern communication channels such as RSS, interactive communication tools, including a calendar of events with an option to receive personal notifications, and a mobile version of the investor relations section that can be quickly accessed via mobile devices.

Recommendations for best practice for listed companies – Principle 5 Companies should have in place remuneration policies and rules to be followed in defining such policies. A remuneration policy should in particular determine the form, structure, and level of remuneration of members of supervisory and management bodies. Commission Recommendation of December 14th 2004 fostering an appropriate regime for the remuneration of directors of listed companies (2004/913/EC) and Commission Recommendation of April 30th 2009 (2009/385/EC) should be applied in defining the remuneration policy for members of supervisory and management bodies.

61 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

The Company does not follow this principle, since the appointment of management board and supervisory board members as well as determination of their remuneration lies within the scope of powers of the Supervisory Board (with respect to members of the Management Board) and the General Shareholders Meeting (with respect to members of the Supervisory Board) and is governed by relevant laws applicable to commercial-law companies in which the Stare Treasury holds a stake of more than 50%. Given the existence of the Act on Remuneration of Persons Managing Certain Legal Entities, there are certain limitations in determining the remuneration of members of the Management and Supervisory Boards.

Best practice for Supervisory Board members – Principle 9 The WSE recommends to public companies and their shareholders that they ensure a balanced proportion of women and men performing management and supervisory duties in companies, thus reinforcing the creativity and innovativeness of their businesses.

The Company's policy with respect to ensuring a balanced proportion of women and men performing management and supervisory functions does not impose any barriers with respect to any candidate applying for a management or supervisory function, however, the Company does place special emphasis on a candidate's professionalism, competence and qualifications for a given position.

Best practice for Supervisory Board members – Principle 8 Annex I to Commission Recommendation of February 15th 2005 on the role of non-executive or supervisory directors (…) should be applied as far as the tasks and the functioning of Supervisory Board committees is concerned.

In the reporting period, the Audit Committee was initially composed of three persons (until April 19th 2010) and then of four persons. The rule concerning the number of independent members of the Committee, which states that at least the majority of Committee members should be independent, was not applied, because pursuant to Par. 351 of the Company's Articles of Association, the Company appoints only one independent member of the Supervisory Board. The independence criteria for members of the Supervisory Board defined in the Company's Articles of Association do not reflect all of the criteria specified in Annex 2 to Commission Recommendation of February 15th 2005. In the reporting period, there was one independent member on the Issuer’s Supervisory Board who met the criteria set out in Par. 351 of the Company’s Articles of Association (Ms Irena Ożóg). In the Issuer's opinion, Ms. Irena Ożóg's qualifications and knowledge are sufficient to ensure a proper and independent supervision of the Company's affairs.

The Company will consider applying the rule in full, in accordance with Annex 2 to the Commission Recommendation of February 15th 2005 on the role of non-executive or supervisory directors (...).

3. Key features of internal control and risk management systems used by the Issuer, described from the point of view of preparation of financial statements and consolidated financial statements

ZA Puławy’s financial statements are prepared on the basis of the applicable laws and internal regulations. The Company’s internal control and risk management systems have a number of organisational and procedural features used in the preparation of its financial statements. They are designed to effectively monitor the process, as well as identify and eliminate any associated risks. The implemented solutions are based on the Company’s organisational rules, document circulation guidelines, accounting policies, as well as the scopes of responsibility and authority of the finance and accounting staff. The Company applies documented accounting policies, which relate in particular to: the Company’s chart of accounts, measurement of its assets and liabilities, calculation of net profit or loss, maintenance of the accounting books, rules to be followed in inventory taking, as well as systems for the protection of data and databases. The tools used by the Company to monitor the effectiveness of its internal control and risk management systems include the internal audit and control functions, which are performed by the Internal Audit and Risk Management Department. The Company takes care that its financial statements are prepared in a proper manner, that is in line with applicable regulations (which set forth the reporting rules and procedures) and in compliance with the principles of fairness and completeness. Data sourced from the accounting records is derived from entries that are made based on appropriate source documents, which are verified through an inventory-taking of assets

62 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011 and review of transactions and balances in individual accounts by dedicated Inventory-Taking and Review Teams. The adopted convention of presenting the financial data is designed to ensure comprehensibility (transparency and clarity of information) and reliability of the financial statements, as well as relevance and comparability of the data contained therein. The Company maintains its accounting books using SAP, an integrated IT system, interoperating with other complementary systems. All systems in place are protected against unauthorised access with passwords and functional system security. Source documents for accounting records are inspected by dedicated organisational units responsible for their review based on the division of duties and authority. Before any accounting entries are made, documents are subject to a final review performed by the accounting and tax personnel. The process of preparing the Company’s financial statements is overseen by the Director of the Finance Division/ Chief Accountant, who supervises the financial and accounting staff responsible for reviewing and recording economic events in the Company’s accounting books and generating the data necessary to prepare the financial statements. Proper operation of the financial and accounting services is ensured by experienced and qualified personnel. Functional supervision over the financial and accounting personnel is provided by heads of relevant organisational units. The accounting policies adopted by a resolution of the Management Board of ZA Puławy meet the requirements set forth in the International Financial Reporting Standards/ International Accounting Standards, and the Polish Accountancy Act. The Company monitors changes to the applicable accounting laws and regulations on an ongoing basis and prepares the process of incorporating any such changes into its rules and policies in considerable advance. Changes to the internal rules and policies necessitated by amendments to accounting and tax laws are made by the Company’s Management Board without undue delay. In order to ensure that tasks related to the preparation of the 2010/2011 financial statements are performed in a complete and timely manner, the Management Board adopted a task schedule which specifies completion deadlines and names organisational units responsible for the delivery of individual tasks. Completed financial statements are presented by the Director of the Finance Division/ Chief Accountant to the Management Board. In order to confirm that the data is correct and consistent with the records in the Company’s accounting books, the financial statements are audited by an independent auditor who issues an opinion thereon. The auditor is selected by the Supervisory Board based on a recommendation given by the Audit Committee, which is a standing committee of the Supervisory Board. As part of its activities, the Audit Committee monitors the financial reporting process, discusses the annual and semi-annual financial statements with the Company's governing bodies and submits recommendations concerning assessment of annual financial statements to the Supervisory Board. The scope of the Committee's responsibilities includes monitoring of independence of the auditing person and the entity qualified to audit financial statements (the auditing firm). Financial statements adopted by the Management Board are subject to assessment by the Supervisory Board, which presents a written assessment report to the General Shareholders Meeting of ZA Puławy. The adopted course of action with regard to preparation of financial statements is to ensure accuracy of disclosed information and its compliance with the law, and to guarantee that potential risks are identified and eliminated sufficiently in advance in order to obtain a reasonable assurance concerning the accuracy and fairness of the financial statements.

4. Shareholders directly or indirectly holding significant blocks of shares; numbers of shares and percentages of Company’s share capital held by such shareholders, and numbers of votes and percentages of the total vote that such shares represent at the general shareholders meeting

ZA Puławy’s shares are listed on the Warsaw Stock Exchange. Its share capital is divided into 19,115,000 ordinary bearer shares with a par value of PLN 10.00 per share. Shareholder structure of ZA Puławy as at June 30th 2011:

63 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

% of total Number of Number of votes at % of the vote at the Shareholder shares the Company’s GM Company’s share Company’s capital held GM State Treasury 9,686,248 9,686,248 50.67% 50.67% Kompania Węglowa S.A 1,892,385 1,892,385 9.90% 9.90% Zbigniew Jakubas and 986,900 986,900 5.16% 5.16% related parties ING Nationale Nederlanden 959,431 959,431 5.02% 5.02% Polska OFE Others 5,590,036 5,590,036 29.25% 29.25% Total 19,115,000 19,115,000 100% 100%

In the period July 1st 2010–June 30th 2011, no Company shares were bought back by the Company or purchased by its related undertakings.

5. Holders of any securities conferring special control powers and description of those powers

Pursuant to Par. 35.1 of the Company’s Articles of Association, as long as the State Treasury remains a shareholder in the Company, the State Treasury, represented by the Minister of State Treasury, is entitled to appoint and remove from office one member of the Supervisory Board. All of the Company shares are ordinary bearer shares and no other special control powers are attached to them.

6. Restrictions on voting rights, such as limitations of the voting rights of holders of a given percentage or number of votes, time limitations for exercising voting rights, or provisions under which, with the Company’s cooperation, the financial rights attaching to securities are separated from the holding of securities

No restrictions on the exercise of voting rights are imposed by the Company's Articles of Association or other internal regulations.

7. Restrictions on transfer of the ownership title to the Company’s securities

No restrictions on the transfer of ownership title to the shares are imposed by the Company's Articles of Association or other internal regulations.

8. Description of the rules governing the appointment and removal of management personnel and of such personnel’s powers, including in particular the power to decide on an issue or buy-back of shares

The Management Board is composed of one to six members. Individual members of the Management Board or the entire Management Board are appointed and removed by the Supervisory Board. Management Board members are appointed for a joint three-year term of office, following a qualification procedure carried out in line with Art.19a of the Act on the Commercialisation and Privatisation of August 30th 1996 (Dz.U. No. 171 of 2002, item 1397, as amended) and Regulation of the Polish Council of Ministers of March 18th 2003 concerning qualification procedures for members of management boards of certain commercial-law companies (Dz. U. No. 55 of 2003, item 476, as amended). The qualification procedure does not apply to the appointment of the Management Board member elected by the Company’s employees. As long as the State Treasury remains a shareholder in the Company and the Company’s annualised average employment number exceeds 500, the Supervisory Board appoints as a Management Board member one person elected by the Company’s employees, to serve for the Management Board’s term of office. A person is considered to be a Management Board candidate elected by the employees if, during the election, 50% plus one of valid votes were cast in favour of such a person, with the reservation that the election results are binding on the Supervisory Board if at least 50% of the Company’s employees participated in the election. Any Management Board member may be removed from office or suspended in duties by the Supervisory Board or the General Shareholders Meeting. The member of the Management Board elected by the employees may also be removed upon a written request submitted by at least 15% of the Company’s employees. The Supervisory Board orders the voting, whose results are binding upon the Supervisory Board provided that at least 50% of the Company’s employees 64 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011 participated in the voting and the percentage of votes cast in favour of the removal is not lower than the majority required to elect a Management Board member. Commercial proxies are appointed by virtue of a Management Board resolution. To appoint a commercial proxy, a unanimous resolution adopted by all Management Board members is required. The power of proxy may be revoked by any Management Board member. The Management Board member who makes the decision to revoke the power of proxy should submit such revocation to be recorded in the minutes of the next Management Board meeting. Powers of the Management Board members and of Commercial Proxies are described in Section 10 of this Statement of Compliance.

9. Rules governing amendments to the Company’s articles of association

An amendment to the Articles of Association requires a resolution of the General Shareholders Meeting adopted by a majority of three-fourths of votes. The Management Board submits any amendment to the Articles of Association to the registry court. The consolidated text of the Company’s Articles of Association is drawn up by the Management Board and subsequently adopted by the Supervisory Board.

10. Composition and activities of the Company’s management, supervisory and administrative bodies or of their committees, and changes in their composition in the last financial year Management staff

Composition of the Management Board

As at July 1st 2010, the Management Board was composed of: Paweł Jarczewski - President of the Management Board Marian Rybak - Vice-President of the Management Board Andrzej Kopeć - Member of the Management Board Marek Kapłucha - Member of the Management Board Zenon Pokojski - Member of the Management Board Wojciech Kozak - Member of the Management Board

There were no changes in the composition of the Management Board in the reporting period. Name

Commercial proxies

As at July 1st 2010, two commercial proxies (joint representation together with a Management Board member) were appointed by the Company: Anna Gol, Hubert Kamola. There were no changes in the composition of the Commercial Proxies in the reporting period. Name

Activities of the management bodies

The Management Board acts pursuant to the Company’s Articles of Association, the Rules of Procedure for the Management Board and the generally applicable laws. 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 Shareholders Meeting or the Supervisory Board by the applicable laws or provisions of the Articles of Association. Management Board is headed by its President. A resolution of the Management Board is required for any matters which do not fall within the scope of the Company’s ordinary course of business, including in particular: 1) the Rules of Procedure for the Management Board, 2) the Company’s Organisational Rules, 3) establishing and closing down of the Company branches, 4) appointing a commercial proxy, 5) contracting and granting of loans, 6) approving the Company’s annual budgets and long-term strategic plans,

65 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

7) assuming contingent liabilities, including the issuance of guarantees, sureties with the value of up to the złoty equivalent of EUR 50,000, and the issuance of promissory notes with the value of up to the złoty equivalent of EUR 30,000, 8) acquiring non-current assets whose value is equal to or exceeds the złoty equivalent of EUR 50,000 and does not exceed the złoty equivalent of EUR 1,000,000, 9) disposing of non-current assets whose value is equal to or exceeds the złoty equivalent of EUR 50,000 and does not exceed the złoty equivalent of EUR 500,000, 10) issues to be examined by the Supervisory Board or the General Shareholders Meeting upon the Management Board's request.

In matters that do not require adoption of a resolution by the Management Board, each Management Board member acts individually, within the scope of duties assigned to such a Management Board member, and also beyond the assigned scope of duties, 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 other Management Board members.

Management Board meetings are held as needed, but at least once a month. A Management Board meeting may be convened by any member of the Management Board who, in such case, is required to notify other Management Board members about the time, place and proposed agenda of the meeting and to deliver materials covered by the meeting’s agenda. 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 the holding of the meeting. Commercial proxies are entitled to make declarations of will and sign on behalf of the Company in relation to all actions before and out of court connected with managing the Company’s affairs, acting jointly with a Management Board member. The Management Board is not authorised to make any decisions to issue or buy back shares. Pursuant to the Articles of Association, decisions on such matters are made by the Company’s General Shareholders Meeting.

Supervisory staff

Composition of the Supervisory Board

As at July 1st 2010, the Company’s Supervisory Board was composed of: Cezary Możeński - Chairperson of the Supervisory Board Irena Ożóg - Deputy Chairperson of the Supervisory Board Jacek Wójtowicz - Secretary of the Supervisory Board Mirosław Kugiel - Member of the Supervisory Board Marta Kulik-Zawadzka - Member of the Supervisory Board Jan Nowicki - Member of the Supervisory Board

There were changes in the composition of the Supervisory Board during the reporting period due to the expiry of the Supervisory Board's term of office. The Annual General Shareholders Meeting of ZA Puławy held on December 16th 2010 appointed the following members of the Supervisory Board for another joint term of office (commencing as of the date of the appointing resolutions): - Andrzej Bartuzi – elected by the Company’s employees - Jacek Wójtowicz – elected by the Company’s employees - Jacek Korski - Marta Kulik-Zawadzka - Cezary Możeński - Irena Ożóg – independent member

At its first meeting held on December 27th 2010, the new Supervisory Board formally constituted itself as follows: Cezary Możeński - Chairperson of the Supervisory Board Irena Ożóg - Deputy Chairperson of the Supervisory Board Jacek Wójtowicz - Secretary of the Supervisory Board Jacek Korski - Member of the Supervisory Board

66 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

Marta Kulik-Zawadzka - Member of the Supervisory Board Andrzej Bartuzi - Member of the Supervisory Board

Activities of the supervisory bodies

The activities of the Supervisory Board are regulated, apart from the generally applicable laws, by the provisions of the Company’s Articles of Association and the Rules of Procedure for the Supervisory Board.

The Company’s Supervisory Board is composed of five to twelve members appointed by the General Shareholders Meeting, with one Supervisory Board member required to meet the independence criteria specified in the Company's Articles of Association. As long as the State Treasury remains a shareholder in the Company, the State Treasury has the right to appoint and remove from office one member of the Supervisory Board. The Company’s employees retain the right to elect the following number of candidates to the Supervisory Board: 1) two candidates - to a Supervisory Board composed of up to six members, 2) three candidates - to a Supervisory Board composed of seven to ten members, 3) four candidates - to a Supervisory Board composed of eleven or more members. Supervisory Board members are appointed for a joint three-year term of office. The Supervisory Board exercises ongoing supervision over the Company’s activities in all areas of its activity, and presents its opinions on all matters submitted by the Management Board for consideration to the General Shareholders Meeting. The powers and responsibilities of the Supervisory Board include, in particular: 1) assessing the Directors’ Report on the Company’s operations and of the financial statements for the previous financial year, in terms of their consistency with the accounting books, documents, and the actual state of affairs, 2) assessing the Management Board’s recommendations concerning the distribution of profit or coverage of loss, 3) submitting written reports on the results of the activities referred to in item 1 and 2 to the General Shareholders Meeting, 4) assessing consolidated financial statements, both in terms of their consistency with the accounting books and documents, and with the actual state of affairs; assessing the Directors' Report on the operations of the Group, and reporting on the results of these activities to the General Shareholders Meeting, 5) selecting a qualified auditor to audit the Company’s financial statements, 6) defining the scope and dates for submission of annual budgets and long-term strategic plans by the Management Board, 7) issuing opinions on the Company’s long-term strategic plans, 8) issuing opinions on annual budgets which include capital expenditure budgets, 9) adopting the Rules of Procedure to provide detailed guidelines regarding the working procedure of the Supervisory Board, 10) adopting a consolidated text of the Articles of Association, prepared by the Management Board, 11) approving the Rules of Procedure for the Management Board, 12) approving the Organisational Rules of the Company, 13) issuing opinions regarding any intended acquisition, disposal or encumbrance of assets such as real estate, right of perpetual usufruct of real estate or interests in real estate, where the value of the transaction is equal to or exceeds the złoty equivalent of EUR 50,000, 14) issuing opinions on any matters to be submitted by the Management Board for consideration to the General Shareholders Meeting, 15) granting authorisation to the Management Board to: a) acquire real estate, right of perpetual usufruct of real estate, or interests in real estate, where the value of the transaction exceeds the złoty equivalent of EUR 100,000 but does not exceed the złoty equivalent of EUR 500,000, b) dispose of or encumber real estate, right of perpetual usufruct of real estate, or an interest in real estate or in the right of perpetual usufruct, where the value of the transaction does not exceed the złoty equivalent of EUR 50,000, c) acquire non-current assets whose value exceeds the złoty equivalent of EUR 1,000,000 and does not exceed the złoty equivalent of EUR 3,000,000, d) dispose of non-current assets whose value exceeds the złoty equivalent of EUR 500,000 and does not exceed the złoty equivalent of EUR 1,000,000,

67 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

e) assume contingent liabilities, including by issuing guarantees and sureties, with a value exceeding the złoty equivalent of EUR 30,000, f) issue promissory notes with a value exceeding the złoty equivalent of EUR 50,000, g) conclude for the Company a material agreement with a related entity within the meaning of the Regulation of the Minister of Finance on current and periodic information to be published by issuers of securities, dated October 19th 2005 (Dz.U. No. 209, item 1744), or within the meaning of any regulations amending or replacing the Regulation, other than any routine agreement with a subsidiary in which the Company holds a majority stake, concluded on an arm’s length basis as part of the Company’s operating activities, 16) appointing and removing from office members of the Management Board, 17) submitting proposals concerning the policies for and the amounts of remuneration of the Management Board members, 18) suspending members of the Management Board from their duties for a good reason, by an absolute majority of votes, 19) delegating Supervisory Board members to temporarily perform the duties of the Management Board members who are unable to do so, 20) granting authorisation for setting up the Company's branches abroad, 21) granting authorisation for Management Board members to serve on governing bodies of other companies, 22) determining the way in which the Company’s voting rights are to be exercised at the General Shareholders Meetings of companies in which the Company holds a stake of more than 50%, if the voting concerns any of the following issues: a) amending the company’s Articles of Association, b) increasing or reducing the company’s share capital, c) merging, transforming or dividing the company, d) disposing of shares in the company, e) disposing of or leasing the company’s business or any organised part thereof, or encumbering it with any limited rights in property, as well as acquiring or disposing of real estate or interest in real estate, where the value of the transaction exceeds the złoty equivalent of EUR 50,000, f) winding up and dissolving the Company.

Supervisory Board members may be removed from office by the General Shareholders Meeting at any time. Supervisory Board meetings are convened by the Chairperson or the Deputy Chairperson of the Supervisory Board whenever the Company’s interest so requires, but not less frequently than once 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 the Management Board. The Supervisory Board makes its decisions by way of resolutions adopted at its meetings. Supervisory Board resolutions may be adopted only with respect to issues included in a meeting’s agenda. Amendments to the agenda may be introduced provided that all Supervisory Board members are attending the meeting and none of them raises any objections to the meeting’s agenda. The foregoing does not apply where specific measures need to be taken by the Supervisory Board to protect the Company against damage or in the case of a resolution regarding the existence of a conflict of interests between a Supervisory Board member and the Company. The Supervisory Board adopts its resolutions in an open vote by an absolute majority of votes. Secret ballot is held upon a request of a Supervisory Board member or in the case of personnel matters. The Supervisory Board may adopt resolutions by written ballot or by using means of remote communication. Adoption of a resolution via means of remote communication requires a justification and a prior submission of the relevant draft resolution to all Supervisory Board members. The method of adopting resolutions via means of remote communication does not apply to the election of a Chairperson, a Deputy Chairperson or Secretary of the Supervisory Board, the appointment of Management Board members and removal from office or suspension in duties of such persons. The Supervisory Board appoints the Audit Committee and may appoint the Remuneration Committee from among its members.

Audit Committee Continuing the practice adopted by the Supervisory Board of the previous term of office, by virtue of Resolution No. 4/VII/2010 of December 27th 2010, the Supervisory Board appointed an Audit Committee composed of the following four persons: − Marta Kulik-Zawadzka − Irena Ożóg – Deputy Chairperson of the Supervisory Board, meeting the independence criteria and qualified in finance and accounting

68 Directors’ Report on the Operations of Zakłady Azotowe Puławy Spółka Akcyjna for the period July 1st 2010–June 30th 2011

− Jacek Wójtowicz − Andrzej Bartuzi The Supervisory Board appointed Mr Andrzej Bartuzi as the Chairperson of the Audit Committee. Until the end of the financial year, the composition of the Audit Committee remained unchanged.

On May 5th 2011, the Supervisory Board adopted the Rules of Procedure for the Audit Committee of ZA Puławy’s Supervisory Board, and issued a statement regarding meeting independence criteria by the Supervisory Board members. In the Supervisory Board's opinion, two of the Supervisory Board members fulfil the independence criteria set out in the Code of Best Practice for WSE Listed Companies: Mr Cezary Możeński, the Chairperson, and Ms Irena Ożóg, the Deputy-Chairperson.

Responsibilities of the Audit Committee include the preparation of opinions and recommendations for the Supervisory Board concerning the following issues: a) monitoring of the financial reporting process, including review of the accounting policies and rules of preparation of financial statements adopted by the Company, b) discussion of annual and semi-annual financial statements with the Company's governing bodies, c) monitoring of performance of services by auditors of financial statements, including discussion of results of audit of annual financial statements, d) giving recommendations to the Supervisory Board as to assessment of the annual financial statements, the Directors' Report on the Company's operations, and the Management Board’s proposals concerning the distribution of profit or coverage of loss, e) giving recommendations to the Supervisory Board concerning selection of an auditor for the Company, f) monitoring of independence of the auditing person and the qualified auditor of financial statements (the auditing firm), including control of the scope of additional assignments given to the auditor by the Management Board, g) receiving the information and representations referred to in Art. 88.2 and Art. 88.3 of the Act on Qualified Auditors from the entity auditing the Company's financial statements, h) monitoring the risk management system, which is of material importance for ensuring proper operation of the Company, i) monitoring the Company's internal control system, j) monitoring of the external control system, as well as monitoring of implementation of recommendations submitted by external auditors, k) supervision of internal audit operations.

11. Activities and main powers of the General Shareholders Meeting, shareholder rights and exercise of such rights, including in particular as stated in the Rules of Procedure for the General Shareholders Meeting, to the extent not provided for directly in the applicable legal regulations

The General Shareholders Meeting operates pursuant to the Articles of Association and the Rules of Procedure for the General Shareholders Meeting, which define in particular the rules governing the activities of the General Shareholders Meeting, the conduct of meetings and the adoption of resolutions. The Rules of Procedure for the General Shareholders Meeting are available on the Company’s website. On July 29th 2009, the Extraordinary General Shareholders Meeting amended the Company's Articles of Association following amendments to the Commercial Companies Code of September 15th 2000, which became effective as of August 3rd 2009. The amended Commercial Companies Code fundamentally changed the organisation process of General Shareholders Meetings. From among the new regulations contained in the Commercial Companies Code Act, the Company adopted only the mandatory provisions concerning such matters as the obligation to publish announcements and materials for the General Shareholders Meeting on the website and the use of electronic forms of contact with shareholders. The optional regulations providing for the participation of shareholders in the General Shareholders Meetings via means of remote communication or voting by postal ballot were not adopted.

Convening of the General Shareholders Meeting

The General Shareholders Meeting is convened by the Company’s Management Board: 1) on its own initiative,

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2) at a request of a shareholder or shareholders representing at least one-twentieth of the share capital, made in writing or in the electronic form, 3) at a written request of shareholder State Treasury, irrespective of its stake in the Company's share capital.

The Extraordinary General Shareholders Meeting may be convened by: 1) the Supervisory Board, if the Board finds it advisable, 2) shareholders representing at least half of the share capital or of the total vote at the General Shareholders Meeting.

General Shareholders Meetings are held in Warsaw or in Puławy.

Drafting of the agenda

1) A General Shareholders Meeting may only adopt resolutions concerning matters included in its detailed agenda (subject to Art. 404 of the Commercial Companies Code).

2) The agenda is proposed by the Company’s Management Board or other entity which convenes the General Shareholders Meeting.

3) A shareholder or shareholders representing at least one-twentieth of the Company’s share capital may request that certain items be placed on the agenda of the next General Shareholders Meeting. This same right accrues to the benefit of shareholder State Treasury, irrespective of its stake in the Company's share capital. Any such request should be submitted to the Management Board no later than twenty-one days prior to the scheduled date of the General Shareholders Meeting and should contain grounds or a draft resolution concerning the proposed agenda item. The request may be submitted in electronic form. 4) A shareholder or shareholders representing at least one-twentieth of the share capital may, before the date of the General Shareholders Meeting, submit to the Company draft resolutions, in written or electronic form, concerning the items placed or to be placed on the agenda of the General Shareholders Meeting. This same right accrues to the benefit of shareholder State Treasury, irrespective of its stake in the Company's share capital. 5) A resolution not to consider an issue placed on the agenda may be adopted only for important reasons. Any proposal to this effect must be supported by a detailed rationale; 6) Any decision to remove an item from the agenda or not to consider an item placed on the agenda at the shareholders’ request requires a General Shareholders Meeting’s resolution, which may be adopted if all the shareholders who placed the item on the agenda are present at the Meeting and have given their consent; the majority required to adopt such a resolution is at least 75% of the votes present at the Meeting.

Filing requests and submissions in electronic form

For the purpose of requests and submissions in electronic form, the Company makes appropriate forms available for download from its website, which – once filled in by a shareholder or shareholders in accordance with the instructions contained in a form – should be returned by them to the Company as an attachment to the e-mail address provided in the form. Filled in forms together with the attachments specified in the forms should be returned to the Company in the PDF format.

Beginning of a General Shareholders Meeting

The General Shareholders Meeting is opened by the Chairperson or Deputy Chairperson of the Supervisory Board, and in the event of absence of such persons – by the President of the Management Board or a person designated by the Management Board. Afterwards, subject to Art. 399.3 and Art. 400.3 of the Commercial Companies Code, the Chairman is selected from among the persons entitled to participate in the General Shareholders Meeting.

Voting right

One share carries the right to one vote at the General Shareholders Meeting. A shareholder may vote each of its shares in a different manner.

Adjournment of the Meeting

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A General Shareholders Meeting may order an adjournment with a majority of two thirds of the total vote. The adjournments may not exceed 30 days in aggregate.

Method of voting

1) The General Shareholders Meeting adopts resolutions irrespective of the number of shares represented at the Meeting. 2) Voting at the General Shareholders Meeting is open. A secret ballot is ordered in the case of electing the Company’s governing bodies or appointing a liquidator of the Company, voting on a proposal to dismiss or call to account members of the Company’s governing bodies or its liquidators, as well as in personnel matters. Additionally, a secret ballot is ordered if at least one of the shareholders present or represented at the General Shareholders Meeting requests so.

Powers of the General Shareholders Meeting

1) Review and approval of the financial statements for the previous financial year, and of the Directors’ Report on the Company’s operations; 2) Granting approval in respect of performance of duties by the members of the Company’s governing bodies; 3) Distribution of profit or coverage of loss; 4) Setting the dividend record date, the dividend payment date or making a decision on payment of dividend in instalments; 5) Appointment and removal from office of the Supervisory Board members, subject to Par. 35.1 of the Articles of Association; 6) Review and approval of the consolidated financial statements of the Group and of the Directors’ Report on the Group's operations for the previous financial year; 7) Suspension of members of the Management Board from duties and their removal from office; 8) Determination of the rules to govern remuneration of the Management Board and Supervisory Board members and the value of such remuneration; 9) Disposing of or leasing the Company’s business or any organised part thereof, or encumbering it with any limited rights in property; 10) Acquisition of real estate, perpetual usufruct right or interest in real estate, where the value of the transaction exceeds the złoty equivalent of EUR 500,000; 11) Disposal of real estate, perpetual usufruct right, interest in real estate or in perpetual usufruct right, or encumbrance of any of the foregoing, where the value of the transaction is equal to or exceeds the złoty equivalent of EUR 50,000; 12) Acquisition of non-current assets with the value exceeding the złoty equivalent of EUR 3,000,000; 13) Disposal of non-current assets whose value equals or exceeds the złoty equivalent of EUR 1,000,000; 14) Execution by the Company of a loan, surety, or any other similar agreement with a member of the Management Board, Supervisory Board, commercial proxy, liquidator, or for the benefit of any such person; 15) Increase or reduction of the Company’s share capital; 16) Issue of bonds or notes of any type; 17) Acquisition of own shares in the situation provided for in Art. 362.1.2 of the Commercial Companies Code; 18) Creation, use, and liquidation of capital reserves; 19) Use of statutory reserve funds; 20) Making decisions with respect to claims for repair of damage inflicted in the establishment of the Company, its management or supervision; 21) Merger, transformation, or division of the Company; 22) Establishment of another company by the Company; 23) Amendments to these Articles of Association and change of the Company’s business profile; 24) Dissolution and liquidation of the Company; 25) Determination of the rules of remuneration for members of the Supervisory Board; 26) Establishment of, transformation into, or joining a European Company; 27) Definition of the Rules of Procedure for the General Shareholders Meeting; 28) Subscribing for or acquiring of shares in other companies (excluding acquisitions made in exchange for the Company’s claims as part of arrangement, recovery, or bankruptcy proceedings), disposal of such shares and determination of the terms and procedure for such disposal, except for: - disposal of shares traded on the public market,

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- disposal of shares held by the Company, whose number does not exceed 10% of the share capital of a given company, - disposal of shares acquired in exchange for the Company’s claims as part of settlement or arrangement proceedings, or shares acquired in exchange for convertible claims referred to in Art. 23 of the Act on Commercialisation and Privatisation of State-Owned Enterprises.

Shareholders’ special rights and the manner of exercising those rights

The Articles of Association grant special rights to one shareholder – the State Treasury:

1. Par. 35.1 of the Articles of Association: “The Supervisory Board shall be composed of five to twelve members, appointed by the General Shareholders Meeting. Notwithstanding the above, as long as the State Treasury remains a shareholder in the Company, the State Treasury, represented by the competent minister, shall have the right to appoint and remove from office one member of the Supervisory Board.”

2. Par. 46.1.3) of the Articles of Association: “The General Shareholders Meeting shall be convened by the Company’s Management Board: 3) At a written request of shareholder State Treasury, irrespective of its stake in the Company's share capital.” 3. Par. 48.3 of the Articles of Association: “A shareholder or shareholders representing at least one-twentieth of the Company’s share capital may request that certain items be placed on the agenda of the next General Shareholders Meeting. This same right accrues to the benefit of shareholder State Treasury, irrespective of its stake in the Company's share capital.”

4. Par. 481.1 of the Articles of Association: “A shareholder or shareholders representing at least one-twentieth of the share capital may, before the date of the General Shareholders Meeting, submit to the Company draft resolutions, in written or electronic form, concerning the items placed or to be placed on the agenda of the General Shareholders Meeting. This same right accrues to the benefit of shareholder State Treasury, irrespective of its stake in the Company's share capital.”

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