Consolidated half-year report including Directors’ Report on the activities of the Zakłady Chemiczne Police Group for the first half of 2017

Grupa Azoty Zakłady Chemiczne Police Group

Contents 1. General information about the Group ...... 3 2. Financial condition and assets ...... 4 2.1. Assessment of non-recurring factors and events having a material impact on the Group’s business and financial results ...... 4 2.2. Market overview ...... 5 2.3. Key financial and economic data ...... 10 2.3.1. Consolidated financial results ...... 10 2.3.2. Segments’ financial results ...... 11 2.3.3. Sales by product groups ...... 14 2.3.4. Operating expenses ...... 15 2.3.5. Structure of assets, equity and liabilities ...... 16 2.3.6. Financial ratios ...... 17 2.4. Financial liquidity ...... 19 2.5. Borrowings ...... 19 2.6. Key projects ...... 21 2.7. Factors which will affect the Group’s results over at least the next reporting period ...... 23 3. Risks and threats ...... 24 3.1. Strategic management ...... 24 3.2. Management of fixed production assets ...... 26 3.3. Comprehensive customer support ...... 27 3.4. Availability of feedstock and materials ...... 29 3.5. Financial management ...... 29 4. Other information ...... 30 4.1. Other material events ...... 30 4.2. Material agreements ...... 31 4.3. Sureties and guarantees ...... 31 4.4. Shareholding structure ...... 32 4.5. Company shares held by management and supervisory personnel ...... 33 4.6. Composition of the Management Board and the Supervisory Board ...... 33 4.7. Environmental protection ...... 36 5. Other information ...... 38

Grupa Azoty Zakłady Chemiczne Police Group Page 2 of 39

Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

1. General information about the Group As at June 30th 2017, the Grupa Azoty Zakłady Chemiczne Police Group comprised Grupa Azoty Zakłady Chemiczne Police S.A. (the “Parent”, the “Company”) and:  nine subsidiaries (in which Grupa Azoty Zakłady Chemiczne Police S.A. held ownership interests above 50%), including one company in liquidation,  one indirect subsidiary,  two associates (in which the Company holds ownership interests below 50%), including one company in liquidation bankruptcy. For a description of the organisation of the Parent and presentation of the Group subsidiaries, see Section 1 of the Directors’ Report on the activities of Grupa Azoty Zakłady Chemiczne Police S.A. and the Grupa Azoty Zakłady Chemiczne Police Group in the twelve months ended December 31st 2016. The Company has for decades been a leading European manufacturer of and one of the largest Polish chemical companies. High sales to external markets make it also one of the largest Polish exporters. The Company’s advantages include a titanium white unit of a type unique in , the size of its , phosphoric acid and sulfuric acid production, as well as strong position in compound mineral fertilizers. Internationally, the Company is recognised not only for its production and sales volumes, but also for contributing to progress in the chemical industry and thus to the development of global agriculture. The Company has been successfully marketing new compound fertilizers, best suited to the mineral content of soil, and thus most effective in application and safe for the environment. The wide product range and the ability to customise products have enabled the Company to market its fertilizers in Poland and abroad, on several continents. The Company pays due regard to CSR matters, engaging in projects that support local communities and regional development. Liaising with local authorities, Grupa Azoty Zakłady Chemiczne Police S.A. supports vocational education, with a particular focus on professions useful to the Company. The Company has also partnered with higher education institutions, sharing expertise with students working on their theses in chemistry, environmental protection, management and marketing. Some of the students are subsequently employed at the Company. Table 1. Parent’s interests in subsidiaries as at June 30th 2017 % of shares held Registered Name Share capital by the Parent office/address directly indirectly

Grupa Azoty Police Serwis ul. Kuźnicka 1, 9,618 100.00 0.00 Sp. z o.o. 72-010 Police, Poland

ul. Kuźnicka 1, Koncept Sp. z o.o. 512 100.00 0.00 72-010 Police, Poland ul. Monopolowa 6, Supra Sp. z o.o. 51-501 Wrocław, 19,721 100.00 0.00 Poland Transtech Usługi ul. Kuźnicka 1, Sprzętowe 9,783 100.00 0.00 72-010 Police, Poland i Transportowe Sp. z o.o. Grupa Azoty Africa S.A. Route de Ngor Villa 132,000 99.99 0.01 w likwidacji (in nr 12, Dakar, thousand liquidation) ul. Kuźnicka 1, ZMPP Sp. z o.o. 32,617 99.98 0.00 72-010 Police, Poland

Page 3 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

ul. Kuźnicka 1, PDH Polska S.A. 1 180,000 84.54 0.00 72-010 Police, Poland

African Investment Group Route de Ngor Villa 340,000 54.90 0.10 S.A. (AFRIG S.A.) nr 12, Dakar, Senegal thousand Infrapark Police S.A. ul. Kuźnicka 1, 9,5592/14 9863 w likwidacji (in 54.43 0.00 72-010 Police, Poland liquidation) budchem Sp. z o.o. ul. Moczyńskiego 8/10, 1,201 48.96 0.00 in liquidation bankruptcy 70-101 Szczecin, Poland

ul. Kuźnicka 6, Kemipol Sp. z o.o. 3,445 33.99 0.00 72-010 Police, Poland

Route de Ngor Villa 33,000 AFRIG Trade SARL 0.00 55.00 nr 12, Dakar, Senegal thousand

2. Financial condition and assets 2.1. Assessment of non-recurring factors and events having a material impact on the Group’s business and financial results Dividends On June 12th 2017, the Management Board passed a resolution to propose to the Annual General Meeting that a dividend of PLN 31,500 thousand be paid to the Company’s shareholders from the net profit earned in January 1st−December 31st 2016. The dividend record date was set as June 30th 2017 and the dividend payment date was July 21st 2017.4 Share capital increase at PDH Polska Spółka Akcyjna On March 29th 2017, the Company’s Management Board decided to acquire up to 5,200,000 Series C new registered shares in PDH Polska S.A., a subsidiary, and on March 31st 2017 the Supervisory Board approved the acquisition.5. On April 5th 2017, the general meeting of PDH Polska S.A. passed a resolution to increase the company’s share capital by way of issue of 5,200,000 new shares. The Company declared its intention to take up, on the first date for exercise of pre-emptive rights, 2,917,875 shares with a par value and issue price of PLN 10 per share. Following the closing of the subscription, on July 11th 2017 the Management Board of PDH Polska S.A. allotted 2,917,875 to the Company, and 2,282,125 shares – to Grupa Azoty S.A. Following the share capital increase of PDH Polska S.A to PLN 180,000 thousand, the Company came to hold 15,217,875 PDH Polska shares, with a total value of PLN 152,178,750, and currently owns 84.54% of the share capital of PDH Polska S.A. Grupa Azoty S.A. holds 2,782,125 PDH Polska shares, representing 15.46% of the company’s share capital.6 On July 14th 2017, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered the capital increase at PDH Polska S.A. Revaluation of expenditure on exploration and evaluation of mineral resources at AFRIG S.A. On August 1st 2017, AFRIG S.A., a subsidiary, resolved to recognise an impairment loss on exploration and evaluation expenditures as a correction of a prior period error in the amount of XOF 4,241,955 thousand (equivalent to PLN 28,349 thousand as translated at the average exchange rate

1 Reflects share capital increase of July 14th 2017. 2 Share capital of Infrapark Police S.A. w likwidacji (in liquidation) as disclosed in its balance sheet in accordance with PAS. 3 Share capital of Infrapark Police S.A. w likwidacji (in liquidation) as disclosed in the National Court Register. 4 For details, see Current Report No. 26/2017, dated June 12th 2017. 5 For details, see Current Report No. 16/2017, dated March 29th 2017, and Current Report No. 18/2017, dated March 31st 2017. 6 For details, see Current Report No. 33/2017, dated July 18th 2017.

Page 4 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise) for the twelve months ended December 31st 2016). In the course of analyses of the documentation owned by the subsidiary, no substantive bases were identified to support the capitalisation of the expenditure in previous years. Accordingly, it was determined that the expenditure neither had brought nor would bring any economic benefits. At the same time, in the light of information available in December 2016, including a report lodged with the prosecution service on alleged misconduct in this matter, the Management Board of the Parent concluded that the impairment loss should have been recognised in profit or loss already 20167.

Consolidation of Supra Agrochemia Sp. z o.o. The Company decided to consolidated Supra Agrochemia Sp. z o.o, a subsidiary, and recognise the effect to retained earnings as a correction of a prior period error, as the Parent had already controlled the subsidiary in previous periods. In addition, the sale of net assets of Supra Agrochemia Sp. z o.o. is highly probable, and therefore as at June 30th 2017, the assets were disclosed as „Non- current assets held for sale” and „Liabilities directly related to assets held for sale”.

2.2. Market overview FERTILIZERS Grains market – Poland According to the Institute of Agricultural Economics and Food Economy, in 2017 the severe weather conditions will limit grain harvest in the country, which is forecast at 29.6m tonnes, compared with 30.1m tonnes a year earlier. The Institute estimates that as a result of increased exports, cereal stocks decline significantly. Prices of cereals in the second quarter of 2017 fluctuated: they were declining in April to rebound in May on stronger demand. Only the price of rape was downtrending during the period. In April, frosts caused significant damage to fruit trees (up to 50%) and vegetable plantations. The frosts also damaged many of the rape plantations. Farmers’ interest in concluding contracts for the supply of cereals from this year’s harvest was rather limited, as prices offered by traders and processors were only indicative and perceived as unattractive by most farmers. Grains market – Europe and the world The strengthening of the euro against the US dollar curtailed exports of cereals, which resulted in contract prices collapsing in Paris: grain contracts were down, followed by rapeseed prices. Despite drought and late spring frosts, in Western Europe the condition of winter rape cropping at key producers was good. According to the revised Grain Strategies for EU-28, in 2017 soft wheat production will reach 142.6m tonnes, i.e. 5% more on 2016. This year’s estimated harvest of rapeseed in the EU-28 is currently around 21–22m tonnes, compared with 20.5m tonnes harvested a year ago. Contract prices for oilseeds from new crops, including rape, are not too encouraging. The declining price of crude oil on world markets is a constraint on prices of oilseeds, and about 60% the rape output in the EU is converted into biofuel. In the period from July 1st 2016 to April 11th 2017, grain exports from the EU reached 29m tonnes, i.e. 23% less year on year. At the same time, cereal imports to the EU were 12.7m tonnes, 20% less than in the same period of the previous season. The global cereal output in the last four seasons (2013/2014 – 2016/2017) was higher than consumption, with global stocks rising; and cereal prices on international markets declined suppressed by strong competition, especially among exporters from the Black Sea region. For the 2017/2018 season, the USDA predicts an increase in cereal production (total) by 14.1m tonnes, to a record level of 2.59bn tonnes. For the end of the current season, there has been an upward 5m tonne correction in the volume of cereal stocks, to a record level of 633.4m tonnes. In the case of wheat, the global forecast has been raised to a new record high of 753.1m tonnes. Wheat stocks at the end of the current season will increase by another 3.1m tonnes, to a record level of 255.4m tonnes. The global forecast for corn output in 2017/2018 has been raised to 1.065bn tonnes (new record), with the largest increase seen in Brazil (+2.5m tonnes) and Argentina (+1.5m

7 For details, see Current Report No. 35/2017, dated August 2nd 2017.

Page 5 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise) tonnes). However, due to the strong consumption growth, corn stocks at the end of this season have been adjusted by only 0.9m tonnes, to a record high of 223.9m tonnes. Global output of oilseeds is expected to rise by 42.2m tonnes, to a new record of 563.4m tonnes. The expected increase in soybean production in South America (Brazil, Argentina, Paraguay and Uruguay) contributed to the change in forecasts. At the end of the season, oilseed stocks are expected increase by 9.3m tonnes, to 99.6m tonnes. In the context of the expected higher soybean production in South America (Brazil: +0.6m tonnes, Argentina: +1m tonnes), global soybean harvest estimates increased to a record 348.0m tonnes. Global soybean stocks are estimated to reach 90.1m tonnes, compared with 77.1m tonnes in the 2015/2016 season. USDA also presented initial forecasts for the 2017/2018 season in the U.S. U.S. wheat production is expected to decline by as much as 21.2%, both due to smaller crop area (-12.3% year-on-year) and lower yields. After last year’s record-high output, corn production is expected to fall by 7.1%, mainly due to smaller crop area. Unlike cereals, U.S. soybean output is expected to grow due to, among other factors, a larger crop area which increased by 7.1% year on year. Ammonia From the beginning of 2017 to the end of the first quarter, the market price of ammonia was rising (except a short-lived correction in February). The upward trend was supported by the suspension (as of February) of transit of ammonia from Russia through Ukraine to the sea terminal in Yuzhny (Black Sea), and periodic supply constraints in various regions. During the second quarter, a strong downward trend in ammonia price persisted. The main contributing factor was the situation in the US ammonia market where, due to unfavourable weather conditions, the demand for ammonia for agricultural purposes was considerably lower, and after the spring season ammonia supply was abundant across the distribution network. At the end of the first quarter of 2017, two new ammonia units were launched in the US and the country, previously a large importer, became a major exporter of ammonia. Figure 1. Ammonia and urea prices [USD/t]

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350

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150

Ammonia Urea US producers began exporting ammonia from the new facilities, with the destinations including North Africa and Europe, and the price decline on the American market led to ammonia prices falling also in other markets. Practically all markets were affected during the second quarter. By the end of the quarter, there were no signals or signs of the downward trend coming to an end. As in 2016, only a significant reduction of output by major exporters could stop further decline in ammonia prices. Average ammonia prices fell by 32% during the second quarter. Urea From the beginning of 2017 to mid-February, urea prices were in an upward trend, driven by constraints of supply from China and Ukraine, and a temporary increase in demand ahead of the spring season. In February, importers on several markets (the U.S., Brazil, Europe) began to scale back their urea purchases due to high prices and growing stocks. By mid-May, demand for urea was lower than in 2016, and urea prices continued to decline. In the second half of May, there was a rebound of urea prices, followed by stabilization. The market was significantly affected by production cuts in China (below 60%), a decrease in the volume of urea exports from the country, and the continued high minimum price of urea in China. Some of the price increase was a result of government tenders announced by India and current purchases by customers in Brazil. At the end of

Page 6 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise) the spring season for urea application, most markets experienced weak demand. At the end of June, the price of urea again slipped into a downward trend. This was mainly due to the activities of U.S. producers who maintained low prices in the U.S., and in Central and South America and blocked access to these markets to other exporters. Fertilizers Poland After the March rebound in fertilizer trading at retail outlets, from April interest in purchases steadily declined. The prices of NPK fertilizers remained relatively stable in April. Demand came mostly from smaller farms, which typically buy fertilizers directly before sowing. As in previous years, May was a period of slowdown in sales of NPK fertilizers to final customers (end of the spring season), and NPK fertilizers producers offered post-season price reductions. Manufacturers restocked retail and distribution warehouses with NPK fertilizers under storage contracts. NPK fertilizer stock also grew at manufacturers, who were building up their inventories for the autumn season. Interest in storage contracts was quite strong among retail operator hoping to purchase of fertilizers at lower prices. This translated in May into a high volume of sales to the distribution network. NPK fertilizers imported from Norway, Finland, Russia and Belarus were available on a regular basis in Poland, Ukraine and Belarus). Distributors dealing in imported fertilizers offered fertilizers from Russia and Belarus at competitive prices. Importers urged farmers to make quick purchasing decisions, as next batches of fertilizers would be offered at much higher prices. By the end of June, large and very large farms purchased the bulk of NPK fertilizers needed for the autumn season. Smaller farms or farms with lesser financial resources will buy NPK fertilizers only after they sell rape. Figure 2. Prices of NPK, DAP [USD/t] 550 500 450 400 350 300 250 200

NPK 16-16-16 DAP

Western Europe On European markets, the weak 2017 season for NPK fertilizers came to an end in April. Apart from local and periodic needs, in the second quarter demand for NPK fertilizers was depressed in most European markets. In Europe, low incomes in agriculture significantly reduced farmers’ purchasing power, also in such markets as France and Germany. The prices of basic NPK fertilizers remained unchanged in April and May. There was growing demand among farmers for blended NPK fertilizers (mainly the UK), as their prices are usually 10−15% lower than prices of compound NPK fertilizers. In most markets, European manufacturers offered significant reductions of NPK fertilizer prices as late as June. Global markets At the beginning of the quarter, the demand for NPK fertilizers on the Russian market, the neighbouring markets and in western Europe was weak, so the Russian producers (PhosAgro, Acron, Eurochem, Uralchem) focused on sales outside Europe and shipped large cargoes to markets such as China, India, Vietnam, Thailand, Malaysia, Kenya and Benin. In May, Russian producers started to shift their attention towards more profitable destinations, i.e. the internal market, the Baltic

Page 7 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

States, Ukraine and Poland. About 200 thousand tonnes of NPK fertilizers were contracted for the internal Russian market in May alone. Large Ukrainian agricultural enterprises were very active in purchasing NPK fertilizers before the autumn season and contracted NPK fertilizers offered by Russian producers. In the second quarter, prices are usually the lowest during the year, and companies were trying to buy as much as possible. Increasing volumes of NPK fertilizer were marketed from new production facilities in Morocco, with large transactions including NPK sales to Nigeria, i.e. the market previously supplied mainly by PhosAgro (Russia) and Yara (Norway). DAP Low stocks of DAP fertilizers before the spring application period and the growing demand on many markets encouraged manufacturers to raise prices in January and February. Also the continued manufacturing and shipment constraints in the United States, China and Morocco were among the factors which supported the increase. During the first quarter of 2017, the average DAP price in the Baltic Sea area increased by approximately 10%. Following the end of the season, since the second half of March, demand for DAP in major markets steadily decreased. The 60% output cut in China and the resumption of DAP imports by India did not help, as supply from new units in Morocco increased. Due to the lack of demand for DAP in major markets, in April manufacturers were able to contract further supplies only by reducing prices, thus sustaining the downward trend. After a period of large declines in DAP prices in April, in May and June the prices stabilized, mainly due to a small number of new transactions. The end of the spring season in China and weak demand caused the Chinese manufacturers to reduce the output to 55-60%. India, the world’s largest importer of DAP, had large stocks in May. The country satisfied its current needs with output from domestic units supported with occasional purchases from various sources (Morocco, the US, China, Jordan, Saudi Arabia). In Europe throughout the second quarter, trading in DAP was minimal, with DAP imports (as of May) stocked in warehouses. On the German market, stocks accumulated at the ports of Rostock, Luebeck and Brake until the end of the quarter will be sufficient to satisfy demand in the autumn season. Similarly, in France, the supply of DAP was large, but the volume of transactions between distributors and farmers was small. During the second quarter, the average price of DAP in the Baltic Sea area decreased by about 6%. RAW MATERIALS FOR MANUFACTURE OF FERTILIZERS Phosphorites The downward trend in phosphorite prices lasted throughout 2016, and corrections of phosphorite prices were seen in the following quarters. There was a correction of phosphorite prices also during the first quarter of 2017 (February). In the second quarter, at the end of April, several important suppliers, i.e. Morocco, China, Peru, Algeria, Togo and Russia, made downward price revisions, and the market approached the 2009 prices. In the second quarter, the global supply of phosphorites was disrupted, but this did not affect prices on international markets. Because of heavy rainfall, the flooded Peruvian phosphorite mine (Bayovar) stopped producing, and some of the long-standing customers had to seek supplies from other sources. In China, the government’s environmental controls were extended to include phosphorite producers, which adversely affected the output and supply, and led to shortages of phosphates. Prices of phosphorites on China’s internal market increased by about 10%. Some Chinese fertilizer manufacturers with operations in coastal locations began import the raw material; for example, first shipments of Moroccan phosphorites were purchased. China is the largest phosphorite producer, and was self-sufficient for years. In Tunisia, after the “colour revolution”, since 2010 the production and supply of phosphorites has been constantly disrupted by conflicting interest groups. Due to disruptions in the supply of phosphorites, for the last several years fertilizer manufacturing units have operated at 50% of their capacities, and exports of phosphorites from the country have been completely stopped. The authorities decided that as of June 2017, the production and supply of phosphorites would be protected by the military. Sales of phosphorites and phosphate fertilizers have always been an important source of revenue in Tunisia.

Page 8 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Potassium chloride In the initial months of 2017, the price of potassium salt was relatively stable, below the level seen at year-end 2016. After a period of stagnation and price stability in late 2016, January 2017 was a busy month for the potassium chloride market due to the need to sign new contracts. In Europe, manufacturers took steps to raise prices. In the second quarter, the price of potassium salt in most markets strengthened, despite subdued demand. The only major markets with strong buying potential were Brazil and, at the beginning of the quarter, the U.S. The rise in potassium chloride prices was mainly due to the introduction of significant production limitations and the solidary behaviour of the largest producers who increased and maintained high prices of the feedstock. In China, the weak demand for potassium salt in the second quarter and the available stocks (comprising about 2 million tonnes of imported salt and 1.5 million tonnes of domestically-produced potassium chloride) discouraged Chinese importers from entering into new contracts for 2017; it is still unclear when new contracts will be signed. It is crucial that the price of potassium chloride for China be set for the remainder of the year as it plays a key role as the usual reference price for exporters and importers in other markets. In India, contracts are in place for the 2016/2017 fertilizer season ending in June. Negotiations for new contracts for the 2017/2018 season will commence in the third quarter. In early May, a new mine in Canada launched production of the salt, and the additional supply of potassium on the market is expected to curb price increases in the second half of the year. Sulfur At the beginning of the second quarter (April), prices of sulfur in such important markets as the Persian Gulf, China, the U.S. and Canada fell, prompting a 4% correction of the price of sulfur in Europe in the first half of the year. Following the correction, contract prices of liquid sulfur in Europe did not change until the end of the quarter. In May, sulfur prices were stable in most markets. Only in China shortages of sulfur, caused by production constraints, led to a price increase. At the end of June, the largest Arabian sulfur producers in the Gulf (Tasweeg, Aramco, and Adnoc) announced an increase in sulfur prices for July by an average of 6%. In the second half of 2017, the demand for sulfur will increase significantly, due to the planned launch of new large phosphoric acid and phosphoric fertilizer plants in Morocco and Saudi Arabia. Natural gas The average price of natural gas traded on the Leipzig (EEX) and Warsaw (PPX) exchanges was on an upward trend from early February, after which the trend reversed and gas prices began to fall, to stabilize at the end of March at EUR 15.7/MWh +/- 1 EUR/MWh (EEX). The average price of natural gas on PPX in the first half of 2017 was 11.4% higher than the average price in the second half of 2016, and 24.2% higher year on year.

PIGMENTS Titanium white Low stockpiles at titanium white producers’, growing seasonal demand, limited supply of imported titanium white, and a severe technical failure of a unit in Finland (10% of titanium white supply to Europe) contributed to the increase in prices in Europe. Quarter on quarter, in the second quarter of 2017, prices of titanium white on European markets increased by an average of 9%–11%. As expected, the price in the U.S. also increased. Limited inventories and demand higher than in the corresponding period in the previous year allowed American producers to raise prices. At the beginning of the quarter prices were rising on the Asian markets and in the Chinese domestic market. Due to the limited supply of titanium white, especially from China, also buyers in Asia had to accept higher prices. Many Chinese titanium white manufacturers were forced by the government to stop production for environmental reasons and will need time to adapt their manufacturing units to the new environmental requirements. It is estimated that China’s titanium white output has fallen by 15%, and China is home to 30% of the world’s titanium white production capacity. No significant increase in the supply of titanium white from China should be expected in the near future.

Page 9 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 3 Market prices of titanium white [EUR/t] 2 500 2 400 2 300 2 200 2 100 2 000 1 900

Titanium white Availability of titanium white on the global market is still very limited, with delivery times of up to 2-3 months. All the world’s largest manufacturers have announced further big price increases in the third quarter of 2017. In Europe, further price increases are expected as well. RAW MATERIALS FOR MANUFACTURE OF PIGMENTS Ilmenite and titanium slag After a slump in early 2016, the prices of raw materials (ilmenite, titanium slag) for the manufacturing of titanium white kept trending upwards through April 2017. The trend was driven by the significant reduction of the inputs’ production in China and the Chinese manufacturers’ increased demand for imports. Also rising prices of titanium white itself encouraged producers of these raw materials to further increase prices. May saw a long-awaited price adjustment. On the representative Chinese market, prices of slag and ilmenite retreated by around 5% on average. Another correction came in June. Compared to May, ilmenite prices on the Chinese market decreased by a further 25% and of titanium slag – by 12%. CHEMICALS Technical-grade urea is used mainly to produce glues for the furniture industry and to prepare the NOXY® (AdBlue®) solution. In the second quarter of 2017, the demand for urea for the manufacturing of adhesives was stable despite the downward trend of urea prices on international markets. In the NOXY segment, despite significant competition among manufacturers, there was a further year-on-year increase in sales, both in Poland and on international markets. It was a result of the Grupa Azoty’s group-wide strategy for the RedNOX® segment (products designed to reduce nitric oxide emissions in the automotive and industrial industries): NOXY® (32.5% urea solution, Adblue®); Likam® (ammonia water); Pulnox® (40% technical-grade urea solution). Iron sulfate is a by-product of titanium white and steel production. In the second quarter of 2017, the demand for iron sulfate (mainly for water purification purposes) continued strong on European markets. The situation has not changed since the technical failure at the titanium white plant in Pori, Finland (early February 2017). Compared with the first quarter of 2017, the demand for iron sulfate from the domestic cement industry was higher (beginning of the cement season); however, the demand for fertilizing purposes was much weaker (end-of-season effect).

2.3. Key financial and economic data 2.3.1. Consolidated financial results The Group’s most important achievements in the first half of 2017 included:  year-on-year increase in the profitability ratios,  dividend payment from 2016 profit,  record high volumes of fertilizer and ammonia sales,  taking advantage of market opportunities and significant improvement of revenues and profits from sale of titanium white,  year-on-year decrease in general and administrative expenses,  decision to continue work on construction of a PDH propylene unit, the Group’s key project.

Page 10 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

In the reporting period, the Group posted a net profit of PLN 100,184 thousand, with EBIT at PLN 127,183 thousand, and EBITDA of PLN 176,981 thousand. Table 2. Consolidated financial data Item H1 2017 H1 2016 change % change Revenue 1,349,918 1,291,837 58,081 4.5 Cost of sales 1,081,376 1,029,373 52,003 5.1 Gross profit 268,542 262,464 6,078 2.3 Distribution expenses 50,976 66,337 -15,361 -23.2 Administrative expenses 82,504 93,154 -10,650 -11.4 Net profit on sales 135,062 102,973 32,089 31.2 Other income/(expenses) -7,879 -11,580 3,701 -32.0 EBIT 127,183 91,393 35,790 39.2 Finance income/(costs) -6,090 -6,085 -5 0.1 Share of profit (loss) of equity-accounted associates 6,640 5,896 744 12.6 Profit before tax 127,733 91,204 36,529 40.1 Income tax 27,549 14,182 13,367 94.3 Net profit/loss 100,184 77,022 23,162 30.1 EBIT 127,183 91,393 35,790 39.2 Depreciation and amortisation 49,798 44,233 5,565 12.6 EBITDA 176,981 135,626 41,355 30.5

Figure 4. EBITDA bridge 15,361 10,650 2,133 30,155 54,631 37,687

176,981 135,626

H1 2016 decrease in increase in decrease in increase in decrease in decrease in H1 2017 EBITDA cost of sales sales volume general financial result selling product prices EBITDA administrative - other expenses expenses

The year-on-year increase in EBIT resulted from record-high volumes of fertilizer and ammonia sales. The downward trend in prices of NPK fertilizers (which reflected general changes in market prices) continued, and the decrease in prices this product group was the main negative deviation from the comparative period. In the first half of 2017, there were favourable changes in the Pigments Segment, where the Company took advantage of the increased demand and supply constraints on the European market to significantly raise prices of titanium white. Year on year, in the reporting period total revenue increased by PLN 58,081 thousand. The improvement was supported by a general decline in prices of raw materials relative to the previous year. The lower prices of feedstock for production of compound fertilizers negotiated by the Company more than offset the increase in the price of natural gas. In the first half of 2017, despite the increase in sales volumes, there was a year-on-year fall in cost of sales. The main cause of the change were the write-offs on AFRIG S.A.’s receivables recognised in June 2016, which then increased the company’s cost of sales. Measures taken to optimise administrative expenses resulted in their reduction by 11% (PLN 10,650 thousand) year on year.

2.3.2. Segments’ financial results In the first half of 2017, the Group’s sales were supported mainly by the optimal level of sales by the Fertilizers Segment, the Group’s dominant source of revenue stream. Another factor which significantly contributed to the improvement in the Group’s results was the improved situation on

Page 11 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise) the titanium white market, which led to a strong year-on-year increase in the Pigment Segment’s EBIT. Table 3. EBIT by segment in the first half of 2017 Other Item Fertilizers Pigments Activities Revenue from external sales 1,141,154 186,261 22,503 Share [%] 84% 14% 2% EBIT 102,000 34,107 -8,924

Table 4. EBIT by segment in the first half of 2016 Other Item Fertilizers Pigments Activities Revenue from external sales 1,111,986 156,546 23,305 Share [%] 86% 12% 2% EBIT 89,537 1,199 657

The negotiated reduction of prices of raw materials for the manufacturing of compound fertilizers and the increase in sales volumes contributed to the improvement of results despite the decrease in prices of NPK fertilizers. Sales of nitrogen fertilizers and ammonia also had a positive impact on the Fertilizers Segment’s overall performance. The 18% increase in the price of natural gas, the key feedstock, was offset by higher (year on year) volumes of ammonia and urea sales in the first half of 2017. Figure 5. Revenue by segment 1 200 000 1 000 000 H1 2016 800 000 600 000 H1 2017

400 000

Fertilizers Pigments

200 000 Other Activities

0 Further increase in prices of titanium white, and the continued strong demand for the product contributed to a significant year-on-year improvement in the Pigment Segment’s results. Figure 6. Structure of revenue by segment

H1 2017 2%

14% Fertilizers

Pigments

Other Activities

84%

Page 12 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

H1 2016 2%

12%

Fertilizers

Pigments

Other Activities

86%

The shares of individual segments in total revenue changed slightly year on year: the Fertilizers Segment’s share dropped by 2pp, while that of the Pigments Segment increased by 2pp. FERTILIZERS In the first half of 2017, the Fertilizers Segment’s revenue was PLN 1,141,154 thousand, i.e. 84% of the Group’s revenue. The segment’s EBIT was PLN 102,000 thousand. The results remain high despite unfavourable trends in the external environment, especially in the market for phosphate fertilizers. The reported prices of NPK fertilizers decreased by an average of 12% year on year. In large part, the negative impact of lower prices was offset by the parallel decrease in prices of key raw materials. Figure 7. Revenue of the Fertilizers Segment 700 000 600 000 500 000 400 000 300 000 200 000 100 000

0

Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q12013

Sales of nitrogen fertilizers and ammonia had a positive impact on the Fertilizers Segment’s overall performance despite an 18% year-on-year surge in the prices of natural gas, a key raw material for the manufacture of those products. In the first half of 2017, there was also an increase of 40% and 14% year on year in sales of ammonia and urea, respectively. Sales on the domestic market accounted for approximately 66% of the Fertilizers Segment’s total sales.

PIGMENTS In the first half of 2017, the Pigments Segment’s revenue was PLN 186,261 thousand, i.e. 14% of the Group’s total revenue. The 19% year-on-year increase in the Segment’s revenue was largely attributable to the Company taking maximum advantage of the opportunities in its internal and external environment. Year on year, the sales volume of titanium white increased by 16%, with sales volumes higher by 2%. Foreign markets accounted for 56% of the Segment’s total revenue.

Page 13 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 8. Revenue of the Pigments Segment 120 000 100 000 80 000 60 000 40 000 20 000

0

Q12013 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q12017 Q42012

The reversal of the long-term downward trend in the prices of titanium white was due to production cuts in China, a technical failure at a Huntsman production plant in Europe, and a seasonal increase in demand. The results recorded in the second quarter of 2017 and the whole of the first half of the year are historically high, and further announcements of price increases for the next periods are encouraging.

OTHER ACTIVITIES Revenue from Other Activities was PLN 22,503 thousand in the first half of 2017, representing 2% of total revenue. The results of the segment in the first half of 2017 were mainly impacted by the results of subsidiaries included in the Other Activities segment, and accrued expenses of PLN 4,485 thousand on exceeding the SO2 emission limits in the six months ended June 30th 2017. 2.3.3. Sales by product groups In the first half of 2017, the Company’s revenue from sales of products and services increased by 4.5% year on year, to PLN 1,349,918 thousand. Compound fertilizers are the key contributor, with an over 55% share in the Company’s sales revenue 55%. The total revenue from sales of fertilizers (NPK, NP, NS) in the first half of 2017 decreased by 6% year on year, to PLN 745,000 thousand. Sales by volume increased by 4%, while the selling prices of compound fertilizers decreased by 9%. In the first half of 2017, revenue from sales of urea was PLN 191,905 thousand, having increased 11% year on year. The increase was mainly attributable to a 14% increase in the volume of sales, which offset a 3% decrease in prices. Figure 9. Revenue by product groups

900 000 800 000 700 000 600 000 H1 2016

500 000 fertilizers 400 000 Compound H1 2017

300 000

Chemicals Urea 200 000 Titanium white

100 000 Other 0

In the first half of 2017, revenue from sales of titanium white was PLN 177,931 thousand, having increased by 19% year on year. The sales volume increased by 2%, and the prices – by 16%.

Page 14 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 10. Structure of revenue by product groups

H1 2017 Other Chemicals 2% 16% Titanium white 13%

Compound fertilizers Urea 55% 14%

H1 2016 Other Chemicals 2% 12% Titanium white 12%

Urea Compound 13% fertilizers 61%

A 40% increase year on year in sales of chemicals, a product group where ammonia accounts for the largest share in sales by value, was mainly attributable to a nearly 40% surge in ammonia sales by volume, and a 7% increase in prices. Revenue classified as „Other” accounts for around 2% of the Parent’s total revenue and is derived mainly from occasional sales of merchandise and services. 2.3.4. Operating expenses In the first half of 2017, operating expenses were PLN 1,249,983 thousand, having increased by PLN 24,055 thousand (2%) year on year. The most important item of operating expenses was the cost of raw materials and consumables used, most of which were generated by the Parent. The year-on-year increase was due to the higher consumption of natural gas, potassium and sulfur on increased output of NPK, ammonia and urea fertilizers. The Group secured lower prices of phosphorites, potassium chloride, and sulfur. On the other hand, prices of natural gas and of raw materials used in the manufacturing of titanium white (titanium slack and ilmenite) increased. Completion of investment projects and of major overhaul works resulted in higher depreciation charges. Salaries and wages increased year on year, chiefly due to the execution of collective pay agreements, partly offset by changes in provisions in the first half of 2017.

Higher taxes and charges were due to higher costs of CO2 emission allowances, higher excise duty, and charges for waste storage, with the increase mainly attributable to the Parent. Other expenses in the first half of 2016 included PLN 19,103 thousand write-offs on receivables at AFRIG S.A., a subsidiary. Lower advertising costs also contributed to the year-on-year change of other expenses in the first half of 2017.

Page 15 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Table 5. Costs by nature of expense Item H1 2017 H1 2016 change % change Depreciation and amortisation 49,798 44,233 5,565 13 Raw materials and consumables used 868,693 839,816 28,877 3 Services 85,823 83,471 2,352 3 Salaries and wages, including overheads, and 163,725 162,748 977 1 other benefits Taxes and charges 54,176 45,245 8,931 20 Other expenses 27,768 50,415 -22,647 -45 Total 1,249,983 1,225,928 24,055 2

Other expenses The share of other expenses (excluding raw materials and consumables) in total costs was 31%, and was relatively unchanged year on year. Table 6. Structure of other expenses [%] Item H1 2017 H1 2016 Depreciation and amortisation 13 11 Services 23 22 Salaries and wages, including overheads, 43 42 and other benefits Taxes and charges 14 12 Other expenses 7 13

2.3.5. Structure of assets, equity and liabilities In the first half of 2017, the Group’s assets increased to PLN 2,113,867 thousand, i.e. by PLN 188,010 thousand on the end of the first half of 2016. As at June 30th 2017, non-current assets were PLN 1,503,661 thousand, and current assets were PLN 610,206 thousand. Year on year, the most significant movements in assets in 2017 included:  a 19% increase in property, plant and equipment, attributable to the completion of new investment projects,  a 6% decrease in inventories, mainly due to a significant decrease in semi-finished products and work in progress by PLN 26,865 thousand,

 a 26% decrease in property rights due to the lower amount of CO2 emission rights at the Parent,  a 72% increase in cash and cash equivalents.  decrease in intangible assets mainly as a result of a PLN 28,349 thousand revaluation of expenditure on exploration and evaluation of mineral resources through correction of previous period error.8 Table 7. Structure of assets Item H1 2017 H1 2016 change % change Non-current assets, including: 1,503,661 1,342,306 161,355 12 Property, plant and equipment 1,359,734 1,143,126 216,608 19 Intangible assets 68,370 98,605 -30,235 -31 Perpetual usufruct of land 6,790 8,034 -1,244 -15 Equity-accounted investees 20,501 19,745 756 4 Investment property 5,323 6,127 -804 -13

8 For details, see Current Report No. 35/2017, dated August 2nd 2017.

Page 16 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Item H1 2017 H1 2016 change % change Deferred tax assets 41,357 62,075 -20,718 -33 Current assets, including: 610,206 583,551 26,655 5 Trade and other receivables 206,589 202,577 4,012 2 Inventories 263,123 281,019 -17,896 -6 Cash and cash equivalents 109,206 63,350 45,856 72 Property rights 27,199 36,605 -9,406 -26 Non-current assets held for sale 3,686 0 3,686 - Total assets 2,113,867 1,925,857 188,010 10

Table 8. Structure of equity and liabilities Item H1 2017 H1 2016 change % change Equity 1,121,928 1,060,527 61,401 6 Non-current liabilities, including: 446,693 330,820 115,873 35 Borrowings 312,350 190,094 122,256 64 Employee benefit obligations 63,506 67,047 -3,541 -5 Provisions 49,491 49,202 289 1 Grants 16,364 18,805 -2,441 -13 Current liabilities, including: 545,246 534,510 10,736 2 Trade and other payables 399,635 340,880 58,755 17 Borrowings 109,707 140,442 -30,735 -22 Grants 12,591 12,116 475 4 Liabilities directly related to assets held for sale 7,809 0 7,809 - Other financial liabilities 1,053 1,101 -48 -4 Total liabilities 991,939 865,330 126,609 15 Total equity and liabilities 2,113,867 1,925,857 188,010 10

The most significant year-on-year changes in equity and liabilities in the reporting period included:  a 6% increase in the Issuer’s equity, i.e. by PLN 61,401 thousand, mainly on retained earnings recognised in the first half of 2017,  a 35% increase in non-current liabilities, mainly due to higher liabilities under borrowings (financing of increase in non-current assets),  a 2% year-on-year increase in current liabilities, resulting mainly from an increase in trade and other payables by PLN 58,755 thousand, i.e. 17%.

2.3.6. Financial ratios Profitability In the first half of 2017, there was a significant year-on-year improvement in the Group’s financial results. This was reflected in the higher EBIT, EBITDA and net profit margins. The ratios calculated in relation to assets and capital improved as net profit grew at a faster rate than assets and equity. The increase in ROCE was attributable to the higher EBIT in the first half of 2017 (increase by 40%). Table 9. Profitability ratios Ratio H1 2017 H1 2016 Gross margin 20% 20% EBIT margin 9% 7% EBITDA margin 13% 10%

Page 17 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Ratio H1 2017 H1 2016 Net margin 7% 6% ROA 5% 4% ROCE 8% 7% ROE 9% 7% Return on non-current assets 7% 6%

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

Liquidity In the first half of 2017, the quick and current ratios remained stable year on year. The cash ratio increased on a considerable level of cash and cash equivalents in the first half of the year (increase by PLN 45,856 thousand year on year). Table 10. Liquidity ratios Ratio H1 2017 H1 2016 Current ratio 1.1 1.1 Quick ratio 0.6 0.6 Cash ratio 0.2 0.1

Ratio formulas: Current ratio = current assets / current liabilities Quick ratio = (current assets - inventories - current prepayments and accrued income) / current liabilities Cash ratio = (cash + other financial assets) / current liabilities. Operating efficiency In the first half of 2017, there was no significant year-on-year change of the average collection period. Year on year, the average collection period shortened by five days. At the same time, the average payment period extended by seven days, chiefly due to a 17% increase in trade payables. The cash conversion cycle was reduced to 12 days. Table 11. Operating efficiency ratios Ratio H1 2017 H1 2016 Inventory turnover 44 49 Average collection period 28 28 Average payment period 67 60 Cash conversion cycle 5 17

Ratio formulas: Inventory turnover in days = (inventory * 180) / cost of sales Average collection period in days = (trade and other receivables * 180) / revenue

Page 18 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Average payment period in days = (trade and other payables * 180) / cost of sales Cash conversion cycle = inventory turnover in days + average collection period in days - average payment period in days Debt In the first half of 2017, the Group’s debt ratios were safe. The total debt ratio increased by 2 pp year on year as liabilities grew faster (increase by 15%) than assets (increase by 10%). There was a 4% increase in the long-term debt ratio, while the short-term debt ratio slightly fell. Relative to the first half of 2016, the interest cover ratio increased due to a 40% increase in profit before tax. Despite a 10 pp decline, the debt-to-equity ratio remains at a safe level.

Table 12. Debt ratios Ratio H1 2017 H1 2016 Total debt ratio 47% 45% Long-term debt ratio 21% 17% Short-term debt ratio 26% 28% Equity-to-debt ratio 113% 123% Interest cover ratio 2,026% 1,938%

Ratio formulas: Total debt ratio = current and non-current liabilities / total assets Long-term debt ratio = non-current liabilities / total assets Short-term debt ratio = current liabilities / total assets Equity-to-debt ratio = equity / current and non-current liabilities Interest cover ratio = (EBIT + interest expense) / interest expense

2.4. Financial liquidity During the reporting period, the Group identified no risks to its financial liquidity. The financial liquidity is one of the key areas constantly monitored by the Group. To secure financial liquidity, the Group uses external sources of financing. Loans are repaid using current business revenues, but the Company always maintains a safe level of credit reserve for use when necessary. The Company identifies and manages its liquidity risk, and operates an active cash flow (payables and receivables) management policy by using such tools as trade credit and prepayments in transactions with customers, and extended payment terms in transactions with suppliers. In the first half of 2017, there were no events of default, whether relating to timely payment of liabilities or other covenants, which could result in debt acceleration.

2.5. Borrowings As at the reporting date, bank borrowings are measured at amortised cost. The basis of measurement is the amount drawn and the interest rate effective as at the reporting date.

Table 13. The Group’s liabilities under bank loans as at June 30th 2017* Bank Amount Available Limit Currency Utilisation (%) Type of instrument drawn amount PKO BP S.A. Multi-purpose credit limit 52,000 11 735** PLN 23 40,265

PKO BP S.A. Overdraft facility 208 900*** 132,157 PLN 63 76,743

BGK S.A. Overdraft facility 80,000 0 PLN 0 80,000

Page 19 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

BGŻ BNP Paribas S.A. 22,000 19,110 EUR 87 2,890 Multi-purpose credit line * In nominal terms. ** Guarantees of PLN 11,735 thousand were provided as part of the facility. *** The limit consists of credit limits available directly to the Issuer (PLN 118,900 thousand) and the Daily Limit available as part of real cash pooling (PLN 90,000 thousand).

Table 14. The Group’s liabilities under borrowings from related parties as at June 30 2017* Related party/ Amount Currenc Available Amount drawn Utilisation (%) Type of liability granted y amount Grupa Azoty S.A. 104,000 42 000** PLN 41 26,000 Investment loan Grupa Azoty S.A. Loan for payment towards 60,000 20,000 PLN 33 40,000 PDH Polska S.A. share capital * In nominal terms. ** Until June 30th 2017, the Parent paid 18 principal instalments. The last tranche, of PLN 26,000 thousand, remains available.

Page 20 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Table 15. Group’s liabilities under non-bank borrowings as at June 30th 2017* Co-financing institution / Amount Curren Used Amount drawn Project granted cy % Regional Fund for Environmental Protection and Water Management in Szczecin 90,000 61,875 PLN 100 Exhaust gas treatment unit and upgrade of the EC II CHP plant

National Fund for Environmental Protection and Water Management 2,945 368 PLN 100 in Szczecin Reclamation of Stawostadion No. 1 at the iron sulfate (II) landfill site

National Fund for Environmental Protection and Water Management 90,000 86,785 PLN 100 in Szczecin Upgrade of ammonia synthesis process * In nominal terms.

2.6. Key projects In the first half of 2017, the Parent’s expenditure on property, plant and equipment and intangible assets was to PLN 88,401 thousand. The Parent’s capital expenditure was PLN 77,170 thousand and included:  mandatory capex PLN 32,340 thousand;  growth capex PLN 31,158 thousand;  maintenance capex PLN 7,933 thousand;  purchase of finished goods PLN 5,739 thousand. In the reporting period, PDH Polska S.A., a subsidiary, spent PLN 27,039 thousand on property, plant and equipment. Figure 11. Structure of the Company’s capital expenditure as at June 30th 2017

8%

10% Inwestycje mandatowe 42% Inwestycje związane z rozwojem biznesu Inwestycje związane z utrzymaniem biznesu 40% Zakup gotowych dóbr

PDH propylene production unit continues as the Group’s main investment project In the first half of 2017, the Group continued work on the project to construct a PDH polypropylene unit, which is crucial for the Group and the Polish economy. Following the optimization of the investment strategy at the end of 2016, the Company continued the tender procedure to select the EPC contractor for the integrated PDH complex comprising the manufacturing unit and a handling and storage terminal with auxiliary infrastructure and, optionally, a polypropylene unit. Following initial analyses of the polypropylene market, and due to: (i) the need to adapt further steps in the process of selecting the license for polypropylene manufacturing technology, and (ii) the synergies between the PDH and polypropylene units, the PDH governing bodies resolved to

Page 21 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise) pursue the polypropane path as the project’s dominant variant. Then, a modified request for proposals was published, thus opening the tender process to additional participants which would make the procedure more competitive. The final decision on the choice of the project variant will be made in the fourth quarter of 2017 after all detailed technical and economic analyses are completed and the feasibility study is finalised. At the present stage of the project preparation, the polypropylene variant seems to be a commercially attractive choice. A strong growth of demand for polypropylene in Central and Eastern Europe is projected until 2025 (forecast CAGR of 4.7%), with no advanced plans to build new PP plants in Europe. Market analyses have also suggested that inclusion of the polypropylene plant in the PDH project would create the potential for the new unit to generate incremental and more stable margins. In addition, the fragmented customer market for polypropylene would also reduce the Group’s market risk over the long term. Polypropylene is currently the main and most attractive derivative of propylene, accounting for more than 60% of the consumption of this raw material in Central Europe. Poland is one of the largest consumers of polypropylene in the region with growing imports (250 thousand tonnes in 2015). The implementation of the polypropylene variant would thus contribute to Poland’s independence in procurement of this raw material. During the reporting period, work continued on the project’s sales stream. The planned PP project has attracted a lot of interest, which confirms the market’s expectation for the emergence of a new supplier. At the end of January 2017, an environmental impact assessment study was submitted to the Regional Directorate for Environmental Protection in Szczecin. During the reporting period, public consultations were held in the region to present to the local population the project’s environmental aspects and benefits to the region. In the third quarter of 2017, the Group expects to obtain an administrative decision specifying the environmental conditions for the PDH project. At the end of 2016, the Council of Ministers incorporated the project’s area into the Special Economic Zone. In August 2017, the managing bodies of the Pomeranian Special Economic Zone are expected to issue a permit for the project to be operated in the SEZ; once the permit is issued, the project will qualify for public aid in the form of income tax exemption. As part of the process of raising financing for the project, discussions were continued with prospective investors and contacts were maintained with financial institutions interested in providing the financing (potential finance providers conducted project evaluation procedures). The PDH project is an important initiative for the Polish economy, as evidenced by the direct support from the Ministry of Maritime and Inland Navigation and the Ministry of Development, and by the inclusion of the project in the National Reindustrialisation Strategy. This offers potential for cooperation in the project execution and financing with both the Polish and EU institutions. PARENT’S KEY PROJECTS In the first half of 2017, the Company launched 16 new projects and continued 43 projects commenced in previous years, with a total capex budget of PLN 36,990 thousand. The most important projects are presented and described below. Exhaust gas treatment unit and upgrade of the EC II CHP plant The objective of the project is to bring the operation of the CHP plant’s installations in line with the requirements of Directive 2010/75/EU. The work on boiler revamping was completed, and the flue gas deNOx unit was assembled. Construction of the FGD unit is under way. Construction of the electrical switchgear and of the housing the sludge removal system was completed, as were the welding work and chemical resistant padding in the scrubber. Assembly of the piping system is in progress. Project budget: PLN 237,300 thousand; expected completion: 2017. Change of the DA-HF phosphoric acid production technology The key objective of the project is to improve the efficiency of phosphoric acid production and the acid’s quality by reducing impurities and waste generation. The new technology will be based on a licence from Prayon Technologies S.A. The design work was completed. The project was divided into two stages. Stage I related to outdoor work, and Stage II comprising work inside the production building. All main process unit components were purchased, and a contract was signed for the delivery of tanks and agitators. Some Stage I construction, installation and electric works were completed. Selection procedure for the Stage II contractor was carried out.

Page 22 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Project budget: PLN 67,000 thousand; expected completion: 2018. Upgrade of TUP-12 (TG1) turbine generator set and auxiliary equipment This project is intended to improve the reliability, safety, flexibility and quality of the turbine control systems across the operating range. A turn-key contract was executed with the contractor. The turbine generator was upgraded. Currently, work continues on the upgrade of the flow section, and revamping of the turbine casing has begun. The working design documentation for the electrical and I&C systems was prepared. Project budget: PLN 16,000 thousand; expected completion: 2018. Development of logistics at Z.Ch. Police S.A. – stage 2 The project will increase the Company’s fertilizer packing capacity, and facilitate loading and forwarding of palletised fertilizers. All construction and assembly works were completed. Operational tests were carried out and a permit to operate the depot was obtained. The commissioning process began. Project budget: PLN 29,739 thousand; expected completion: 2017. Replacement of the 311 X PN-2 fertilizer drying unit A new drying plant will guarantee a smooth fertilizer drying process. A turnkey contract for the supply and assembly of the drying plant was signed and an opinion was issued on the construction and assembly documentation provided by the Contractor. Project budget: PLN 12,000 thousand; expected completion: 2018.

2.7. Factors which will affect the Group’s results over at least the next reporting period Exchange rates In the first half of 2017, the Polish currency was strengthening. Fluctuations in the currency pairs in the second half of the year will be largely driven by changes expected on the global markets. Most analysts expect the Polish złoty to adjust downwards in the third quarter of the year. The medium- term prospects for the Polish currency are good. After correction, at the turn of the third and fourth quarters the zloty is expected to return to the appreciation trend. In this context, the Company expects the EUR/PLN exchange rate to stay within the 4.17–4.30 range. The USD/PLN exchange rate is forecast to forecast to retreat to the 3.60–3.78 range. Due to higher volatility, the USD/PLN currency pair carries a greater risk. However, the Company uses natural hedging and EUR/USD spot contracts to balance its currency position. Therefore, the forecast currency trends should not have a material bearing on the Company’s results in the second half of 2017. Interest rates in Poland In the first half of 2017, the Monetary Policy Council did not change its monetary policy. The Council believes that in the coming quarters inflation will remain stable at a moderate level, that is below the central bank’s projections (2.50%). The Governor of the National Bank of Poland does not expect any changes in interest rates before the end of 2017, which means that the Company’s borrowing costs remain at a stable level during the year. Prices of raw materials and products PRODUCTS Ammonia Given the excessive supply of ammonia in the international markets, the price of ammonia is expected, as in 2016, at the level of 170 USD/t, i.e. below the cost of production for many manufacturers, including Russian producers, who also must cover significant costs of the product transport to the ports. As in 2016, only a significant reduction of output by major exporters could stop further decline in ammonia prices.

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Urea In the third quarter of 2017, due to the global overproduction of urea and the period of reduced application in most markets, the price of urea will stay close to minimum levels, and no significant rebound should be expected. Resumption of urea imports (or absence thereof) for the next season to the US and Europe will be of significant importance for the price formation. In June, U.S. importers continued to re-export urea bought in the spring. As usual, the quantity of urea purchased through government procurement in India will be important, but this year India’s purchases have been unusually limited. Compound fertilizers In Poland and Europe, the third quarter is usually a period of increased use of NPK fertilizers. Demand for NPK fertilizers is expected to increase in the second half of August and in September. Because of the not so high prices of many agricultural products, only a moderate increase in prices of NPK fertilizer can be expected. In the first half of the year, large DAP units were launched in Morocco and Saudi Arabia. India, the largest importer of DAP, is pursuing a policy of economical fertilizer purchases this year, and therefore any significant increase in demand from this market is rather unlikely. In this context, the price of DAP will be under heavy pressures in the third quarter. Titanium white Production cuts (especially in China) and the resulting lower supplies will push prices of titanium white further up in the third quarter of 2017. Additionally, the reduced supply will coincide with a seasonal increase in demand for titanium white from the paint and varnish industry. There is also a growing demand for titanium white from other industries, driven by the improving economic conditions. Against this backdrop, most manufacturers have already announced significant price increases in the third quarter in Europe (and on other markets as well), and these increases are unavoidable. RAW MATERIALS Phosphorites In the context of the forecast lower demand for DAP and the pressures on DAP prices, most suppliers have announced further price cuts for the third quarter of 2017. Sulfur In the second half of 2017, the demand for sulfur will increase significantly, due to the launch of new large phosphoric acid and phosphoric fertilizer plants in Morocco and Saudi Arabia. At the end of June, the largest Arabian sulfur producers in the Gulf announced increase in sulfur prices for July by an average of +6%. Also in China, the price of sulfur was steadily rising. In Europe, analysts expect that sulfur will remain relatively unchanged on the second quarter of 2017. Potassium chloride The big question mark in the third quarter of is whether large deliveries of potassium salt to China and India will be resumed. Given the current production constraints and the determination of the largest producers, prices of potassium chloride should be expected to increase in the third quarter. However, K+S’ new production capacities in Canada will be a limiting factor. Ilmenite and titanium slag After the price peak in April 2017 and the fall in prices in May and June, the downward trend may be expected to continue in the third quarter of the year, although it will be less spectacular than in the second quarter.

3. Risks and threats 3.1. Strategic management Risks associated with the planning and execution of strategic projects The Grupa Azoty Group Strategy provides for a number of projects to enhance the Grupa Azoty Group’s competitive advantage on the market. Delivery of the Strategy depends on a number of factors, including those outside of the Company’s control. The “Grupa Azoty Group Strategy for 2014–2020 – Operationalisation” defines three strategic areas of key importance for the value growth, including organic growth achieved through investment projects.

Page 24 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

The Company will focus on developing new products and enhancing the efficiency of existing units. It is also planning to secure new sources of raw materials and reduce production costs of key products. Moreover, a number of upgrades to the existing units are planned in the coming years, to bring the facilities into compliance with applicable legal requirements, such as the IED Directive. The planning and execution of strategic projects entail multiple risks. The main risk is associated with failure to complete investment projects according to initial plans and failure to achieve the expected results. The project preparation phase involves the risk of failure to accurately assess the changing environment. Key projects also carry the risk of selecting unsuitable technologies and units responsible for their execution. If a project is not duly prepared or unexpected circumstances arise, the Company also risks incurring additional capital expenditure during its execution. The success of strategic projects is contingent on many external and internal factors. The main external factors affecting the Company’s growth opportunities and growth rate include macroeconomic factors, market situation, economic environment, and the activities of main competitors. The adverse impact of these factors, which are largely beyond the Company’s control, may impede the achievement of the Company’s growth ambitions and strategic goals. Major internal factors and efforts relevant to the Company’s growth include the technical condition of production units and organisational preparedness to follow the investment programme. To mitigate the risk accompanying strategic projects, the Company has introduced internal procedures defining and governing the process of preparing and executing investment projects. The planning phase is based on reliable market information sourced from reports of external market research firms, or opinions of technology, economic and market advisors. Oversight has been introduced over strategic projects, which involves a review of the key assumptions of each project (business effects, budgets, KPIs, schedules, division of responsibilities). Regular projects status updates are provided, and Project Managers are required to prepare monthly and quarterly reports on the project implementation. Such reports cover the risks and threats related to specific projects. A uniform risk assessment methodology for the planning and execution of strategic projects has been introduced. The risk assessment procedure involves two aspects of key importance for the implementation of strategic projects: their budgets and completion deadlines. Risk indicators for strategic projects are monitored on a regular basis and reported quarterly. As part of the management of risks associated with strategic project planning and execution, a number of steps are planned to reduce the likelihood of such risks materialising. Although relevant procedures have been put in place to mitigate such risks, the implementation of major, technically and technologically complex projects may require revisions to their budgets and completion deadlines, Risk of implementation / tightening of EU / local regulations restricting the use of products marketed by the Company The Company monitors and implements new requirements on an ongoing basis. It takes an active part in the work of registration consortia and European associations, and cooperates with Polish institutions to receive advance information on upcoming changes in the legislation. In each case the Company reviews the impact of new regulations on its operations and marketed products. Amendments to EU directives and regulations concerning the Group’s key manufacturing and trading activities give rise to a potential risk that the use and application of the Company’s products by customers in the EU countries may be adversely affected. The Company is currently identifying the risks posed by the new draft Fertilizer Regulation of the European Parliament and the EU Council, intended to replace the existing Regulation (EC) No. 2003/2003 of the European Parliament and the EU Council of September 13th 2003, relating to fertilizers. The new document is designed to implement the principles of the Circular Economy package. The proposal assumes an uninterrupted flow of goods on the single EU market, preceded by the mandatory harmonisation of fertilizing products (CE marking). The European Commission’s proposal also covers the use of organic waste and bio-waste as raw materials to manufacture fertilizers, as well as recycling and reuse of valuable manufacturing components. The new rules will apply to all types of fertilizers to ensure the highest level of soil protection. The Regulation introduces strict limits for heavy metal contamination, including cadmium content in phosphate fertilizers. The European Commission assumes that this will reduce exposure to health and environmental risks. Moreover, this way the EU intends to reduce the dependence of the fertilizer industry on imports of phosphorus-bearing materials. The Company is taking steps pertaining to the wording of the regulation. The Company appointed a dedicated expert team which actively participates in the legislative work. In cooperation with the

Page 25 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Alliance Europeenne des Engrais Phosphates AEEP, the Company maintains regular communication with key MEPs and the Polish government’s representatives to the EU Council, and holds discussions with representatives of the European Commission which has proposed the new legislation. The Company’s activities are designed to ensure that the new regulation provides for an 80 mg limit of cadmium per 1 kg of phosphorus pentoxide (P2O5). On the one hand, this would enable the European Commission to achieve its pro-environmental objective and, on the other hand, the industry would be able to adapt its operations to the new requirements and implement the necessary technology. The Company also engages in research and development activities in partnership with research institutes to develop technologies for removal of heavy metals from fertilizer product streams.

Work is under way to implement into Polish law the Directive of the European Parliament and of the Council on the reduction of national emissions of certain atmospheric pollutants and amending Directive 2003/35/EC (NEC Directive, COM(2013)92). The draft proposes that ammonia emissions be reduced. The agricultural sector can expect new requirements concerning ammonia emissions from different types of mineral fertilizers, primarily those based on ammonia (especially urea) rather than nitrate fertilizers. Additionally, the Company monitors other aspects of EU regulations, such as free trade agreements (DCFTA Ukraine, TTIP). Grupa Azoty also takes steps to ensure that the entire manufacturing and distribution process meets the safety requirements applicable to trading in its products.

3.2. Management of fixed production assets Risk of major industrial accidents or technical failures resulting in disruption of operations and stoppage of key production units The Company conducts operations that involve handling large quantities of hazardous chemical substances. The Company’s priority is to observe the most stringent safety standards to minimise the risk of industrial accidents. The measures and programmes implemented by the Parent ensure appropriate conditions for the manufacture, storage, transport and distribution of substances to meet the environmental protection requirements. The Company is classified as an establishment with a high risk of a major industrial accident (upper- tier establishment — UTE). The Company has developed and introduced mandatory programmes to prevent such accidents, and regularly monitors and implements legal requirements relating to safety, including the requirements of the Seveso III Directive transposed into Polish legislation. Grupa Azoty Zakłady Chemiczne Police S.A. has in place technical and organisational measures to prevent industrial accidents and mitigate their consequences. The well-trained Company Fire Brigade, with additional support from chemical rescue teams and other services, is capable of undertaking effective rescue operations in any situation. The correctness of work safety solutions in place at the Company is assessed by external inspection authorities and accreditation/certification bodies. The Company’s due care for safety is evidenced by the certificates it holds. Such organisational and technical measures allow the Company to maintain high safety standards and consistently reduce its environmental footprint. The Company’s efforts to improve working conditions, Company-wide work safety campaigns and the free disease prevention programme offered to employees have been recognised by external institutions − for instance, the Company once again received the Gold Card Leader on Safety at Work Award (2017-2018). The Parent’s units are equipped with a range of process interlocks and interlocks supervised by the Technical Inspection Office that prevent accidents and ensure operational and equipment safety in the event of disruption of operations. TPL (Total Preventive Maintenance) programmes and modern Preventive Maintenance programmes implemented across all organisational units of the Company, supported by the CMMS system and planned plant maintenance management, will significantly enhance the technical condition and reliability of units, thereby minimising the risk of accidents. Our strategy of industrial accident and technical failure risk management is primarily focused on mitigating the risk of any critical situation occurring, but also provides for the apportionment of its consequences between insurers should any risk materialise. In line with the applied internal procedure, each failure is followed by activities specified in reports prepared by emergency committees or in corrective/preventive action plans.

Page 26 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

No serious industrial accidents occurred at the Company in the first half of 2017.

Risk of failure to meet deadlines for reduction of NOX, SO2 and particulate matter emissions The Regulation of the Minister of Environment dated November 4th 2014 on emission standards for certain units, fuel combustion sources, as well as waste incineration and co-incineration equipment introduced, as of January 1st 2016, new and more restrictive emissions standards for fuel combustion installations. The new standards apply to sulfur dioxide, nitric oxides and particulate matter emission limits. The Industrial Emissions Directive and Environmental Protection Law provide for mechanisms postponing the effective date of the more restrictive emissions standards. One such mechanism is the Transitional National Plan (TNP). The fuel combustion sources, including the EC II CHP plant, have been submitted for inclusion in the TNP. According to the TNP derogatory mechanism, for combustion sources of the EC II CHP plant, from January 1st 2016 to June 30th 2020 the emission limits “are calculated for each year as a moving average”. In order to avoid exceeding the emission limits set out in the TNP, the EC II CHP plant will require completion of investments aimed at reducing its output of NO2, SOx and particulate matter. Since January 1st 2016, lower emission standards for particulate matter have also been applicable to the units of the EC I CHP plant.

Measures to reduce NO2, SOx and particulate matter emissions are intended to decrease a particular risk or, should it materialise, to minimise its negative consequences. As part of risk management, ongoing monitoring and monthly reports are provided to ensure that the investment schedule and the percentage share (monthly/annual) of SO2 emissions in the limits set in the TNP are observed. Last year, the EC II electrostatic precipitators were upgraded to reduce particulate matter concentrations below 20 mg/Nm3, thus enabling compliance with the relevant provisions of the Directive. Risk associated with new legal requirements relating to production processes The Company manages this risk through the ongoing monitoring of current legislation and response to changes in legal regulations. The Company participates in social consultations of draft legal acts. Environmental protection laws and regulations, transposing the IED Directive, introduced new requirements applicable to the titanium white manufacturing unit. As of 2015, new emissions standards and requirements for air pollutant emissions monitoring apply. To meet these requirements, it is necessary to keep the air pollution control systems (mainly the FGD unit and dust extraction equipment) and the continuous emissions monitoring system in proper working order. The Company actively participated in the consultations of the new draft Water Law and presented its position on fees for withdrawal of inland seawater. The Company’s position was reflected in the final wording of the act, which was signed into law by the President of the Republic of Poland on August 2nd 2017. Currently no fees apply to withdrawal of inland seawater. In 2016, pursuant to decision WOŚ.II.7222.6.7.2016.MG of the Marshal of the Province of Szczecin, dated September 21st 2016, the sixth amendment was made to the Company’s integrated permit. In the first half of 2017, work was under way on a request for amendment of the integrated permit following the announcement of new BAT conclusions for CWW and receipt by the Company of a relevant notice from the Marshall Office. The deadline for submission of the request to the Marshall Office is December 2nd 2017. The Company has four years to ensure compliance with the BAT conclusions.

3.3. Comprehensive customer support Risk of higher fertilizers imports (Europe, China, Russia, Africa, and America) The Company identifies the following risks for the Fertilizers Segment:  Increased imports of nitrogen and compound fertilizers, produced based on cheaper raw materials, to Poland and the EU, and consequently persisting oversupply and aggressive pricing policies pursued by importers struggling to maintain their shares in the fertilizers market;  Launch of significant new manufacturing capacities, particularly in the urea market (the U.S., Algeria, India) where oversupply periodically affects prices of other nitrogen fertilizers;  Increased DAP production capacity – Morocco and Saudi Arabia;  Increase in production capacities of nitrate fertilizers in Hungary and stronger impact of this product on the market in southern Poland;

Page 27 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

 Ban on trade in nitrate and CAN in Turkey, introduced for an indefinite period in response to terrorist attacks in this country − search for EU markets to sell products made or sold in Turkey;  Mergers and acquisitions of chemical companies, which might translate into their being able to exert more pressure on the EU fertilizer market;  Competition growing stronger as new products are marketed and more effective technologies applied. In order to mitigate the identified risks and to strengthen and consolidate its leadership in the segment, the Company has been taking steps to optimise the production costs and broaden the portfolio of products and services offered. Measures taken by the Company to strengthen its competitive advantages in the fertilizers segment:  Implementation of the Group’s updated distribution strategy,  Implementation of projects designed to improve the efficiency of production processes,  Strengthening the Group’s market position through acquisitions and placement of new products in the market,  Taking active part in the process of consolidation of the chemical industry,  Initiation of anti-dumping proceedings,  Active participation in the work of Fertilizers Europe,  Cooperation with universities and research institutes,  Supporting agricultural producers by providing them with access to state-of-the-art fertilizing and production solutions. Risk of deteriorated supply-demand balance The Company operates in a demanding and changeable competitive environment, frequently facing an unfavourable demand-supply relationship, and prices of the fertilizers it manufactures strongly depend on the levels of local and international supply and demand. The market of titanium white is governed by the same patterns. Some of the Company’s competitors may have access to newer technologies or cheaper raw materials, or – thanks to their more favourable geographical location – may have better access to raw materials and target markets. Some manufacturers from the Company’s immediate environment are increasing their production capacities. Because of these factors, the prices of and demand for the Company’s products fluctuate. The risks related to fertilizer production include the following factors:  There is a risk that the safeguards protecting the EU market against imports of products from regions which apply a dual pricing policy might be loosened. The dual pricing policy pursued by some countries poses a threat to the Company’s business and its ability to sell products. Dual pricing of natural gas,  Capacity expansion plans of the Company’s major competitors by in 2020,  Increased DAP production capacity – Morocco and Saudi Arabia;  Approval of requests for suspension of duties on DAP and ammonia imported to the EU;  Inactive Venezuelan market (country on the verge of bankruptcy). The key risks related to titanium white include:  Weaker demand for titanium white from manufacturers of paints and varnishes,  Increased quality requirements concerning the use of titanium white in the plastics and paper industries,  Significant increase in the production capacities of Chinese manufacturers.

 Work related to the possible classification of TiO2 as a carcinogen – industry organizations have submitted a position indicating that there is insufficient evidence for the classification; further consultations are pending. There is a potential risk of exacerbating the unfavourable trend of titanium white manufacturers and importers from outside Europe increasing their activity. The main supply sources are China and Ukraine. The economic situation, combined with currency exchange rates, has led to sharp price declines. To maintain its current market position, the Company has adopted a restructuring plan to increase sales on both the domestic and export markets by trying to reach new, smaller customers and focusing more on strategic markets. These efforts help to keep its margins relatively flat.

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Measures taken by the Company to strengthen its competitive advantages on the fertilizer market include investment projects designed to improve the efficiency and flexibility of production processes. At the same time, the Company is diversifying its sales markets and customer base. Risk related to customers’ growing quality and environmental requirements Since 2016, the European Commission has been working intensively to introduce caps on cadmium content in phosphate fertilizers. Grupa Azoty is actively involved in the process, providing expert support to Fertilizers Europe, a fertilizer industry organisation, to help it convince the Commission that there is no scientific evidence that would justify tight restrictions on cadmium content in fertilizers. For years, the Company has been engaged in applied science projects, which result in new or improved products. There is a potential risk of falling demand from distributors in countries where local regulations have been adopted to limit the content of heavy metals in fertilizers used by farmers (the Czech Republic, Slovakia, and Hungary). There is a potential risk of slowing demand from end users customers (the cement industry) for iron sulfate in the form offered by the Parent as demand for the product in the granular form grows.

3.4. Availability of feedstock and materials Risk related to maintaining continuity of ammonia production / ammonia availability The way in which the ammonia unit operates in a continuous mode entails a wide range of risks. Key risks that may affect the continuity of ammonia production should be divided into internal and external factors. The external factors affecting production continuity, which are beyond the Company’s control, include oversupply on the ammonia market, falling prices on the local and international markets, economic environment, political factors governing the availability of transmission pipelines and, as a result, disruptions in the supply of natural gas, which is the Company’s basic feedstock, as well as the demand mechanism, considerably dependent on the economic environment. Precisely selected tools and assumed objectives, such as diversification of feedstock supplies, market research and analyses and flexible management of customer base, serve to minimise the risks. The internal factors include technological constraints, such as the type and structure of equipment, complexity, nature of emergency repair works, availability of the specialist maintenance team and spare parts. The Company has undertaken a number of initiatives to ensure reliable operation of the unit and maximum availability of machinery and equipment, including:  Implementation of the TPL programme and Preventive Maintenance programmes, supported by the CMMS system, and planned management of plant maintenance, which will significantly enhance the technical condition and reliability of units, thereby minimising the risk of failures;  Upgrade of the ammonia unit, mainly to reduce energy-intensity that will bring savings in key feedstocks and utilities (natural gas, steam heat, electricity);  Optimisation of the ammonia production process, manifested in effective management of the stream of production with appropriate selection of operating parameters for machinery and equipment, which results in maximum capacity utilisation and achievement of target production volumes. The risk management strategy for maintaining ammonia production continuity and ammonia availability is focused on risk mitigation measures aimed at harnessing synergies and diversifying feedstock supplies. The supplies management within the Grupa Azoty Group is based on optimised intra-Group ammonia supplies, which affords a greater degree of flexibility in relations with external suppliers and ability to respond to adverse market trends.

3.5. Financial management

Risk of a negative effect of CO2 trading prices on the financial result

Measures aimed at reducing the risk of a negative effect of CO2 trading prices on the Company’s performance consist in continuous monitoring of the emission allowances market and purchase of emission allowances on the SPOT market when prices are favourable. In addition, a part of future

Page 29 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise) emission allowances are acquired under forward contracts, i.e. purchase of emission allowances in the form of derivative financial instruments that give rise to an obligation to deliver allowances on future dates on which they should be redeemed, in accordance with the current purchase strategy.

4. Other information 4.1. Other material events Recommendation for extension of PDH project to include polypropylene option On June 26th 2017, the management board of PDH Polska S.A. passed a resolution recommending that construction of a polypropylene plant be the preferred option for the project to construct a petrochemical complex comprising a PDH unit, a polypropylene unit, a port with a storage tank depot, auxiliary facilities and inter-unit connections, with an annual nominal production capacity of approximately 400,000 tonnes of polypropylene9. On the same day, the recommendation was approved by the company’s supervisory board. The final decision on how the project is to be implemented will be made upon completion of the feasibility study, in which the estimated value of the project will be determined. Material agreements On January 17th 2017, the Company executed an ilmenite supply contract with Titania AS of Hauge i Dalane, Norway. The contract, with an estimated value of PLN 140,000 thousand, was concluded for a definite term, from September 1st 2016 to December 31st 2019, with ilmenite will be delivered according to the agreed schedule and on the agreed commercial terms.10 On June 21st 2017, the Company, Grupa Azoty S.A. – its parent, and Grupa Azoty Zakłady Azotowe Puławy S.A., Grupa Azoty Zakłady Azotowe Kędzierzyn S.A., and Grupa Azoty Kopalnie i Zakłady Chemiczne Siarki Siarkopol S.A. concluded bilateral contracts to the framework gas supply agreement of April 13th 2016 with Polskie Górnictwo Naftowe i Gazownictwo S.A. Under the contracts, PGNiG S.A. is to supply gas fuel from October 1st 2018 to September 30th 2020, and the contract term may be extended until September 30th 2022. The execution of the bilateral contracts involved shortening of the term of the existing contracts, executed on April 13th 2016 between the Grupa Azoty Group customers and PGNiG S.A., to September 30th 201811. On May 8th 2017, the Company executed a contract for the purchase of Moroccan phosphate rock with Office Chérifien des Phosphates of Casablanca, Morocco12. The contract was executed for the term from April 1st 2017 to December 31st 2017, and defines a specific schedule and other commercial terms of deliveries. The value of deliveries under the contract is estimated at PLN 135,000 thousand and exceeds 10% of the Company’s equity. Remuneration policy for members of the Management Board On March 29th 2017, the Extraordinary General Meeting passed Resolution No. 5 approving the rules of remuneration for members of the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. According to the resolution, the remuneration comprises a fixed component and a variable component. The Company’s Supervisory Board was authorised to determine the amounts of the fixed remuneration component for individual Management Board members. On March 31st 2017, by Resolution No. 66/VII/17, the Supervisory Board adopted the ‘Remuneration policy for members of the management and supervisory bodies at the Group companies’. Subsequently, on April 6th 2017, the Supervisory Board passed resolutions No. 95/VII/17, No. 96/VII/17 and No. 97/VII/17, defining the amounts of the fixed remuneration component for individual Management Board members (depending on a member’s position on the Management Board).

9 For details, see Current Report No. 29/2017, dated June 26th 2017. 10 For details, see Current Report No. 1/2017, dated January 17th 2017. 11 For details, see Current Report No. 28/2017, dated June 21st 2017. 12 For details, see Current Report No. 21/2017, dated May 8th 2017.

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4.2. Material agreements Table 16. Agreements material to the Parent’s business Date and Agreement Party Subject matter number of Value date current report Jan 17 2017 Current Titania AS Ilmenite purchase Jan 17 2017 Report No. 140,000 1/2017 May 8 2017 Office Chérifien des Current Purchase of phosphorites May 8 2017 135,000 Phosphates Report No. 21/2017 Jun 21 2017 Polskie Górnictwo Current Naftowe i Supply of gas fuel Jun 21 2017 1,800,000 Report No. Gazownictwo S.A. 28/2017

4.3. Sureties and guarantees Table 17. Sureties provided by the Parent as at June 30th 2017 Type/ Curren Beneficiary Details Issue date Amount Issuer cy Revolving credit Surety for syndicated Grupa Azoty S.A. facility PLN 23.04.2015 600,000 credit facility agreement Surety for PKO BP Overdraft facility credit facility Grupa Azoty S.A. PLN Sep 20 2016 124,000 agreement (overdraft) Multi-purpose Surety for PKO BP Grupa Azoty S.A. credit facility PLN Sep 20 2016 96,000 credit facility (MPCF) agreement Guarantee of Credit facility repayment of EIB Grupa Azoty S.A. PLN 28.05.2015 220,000 agreement credit facility Guarantee of Credit facility repayment of EBRD Grupa Azoty S.A. PLN 28.05.2015 60,000 agreement credit facility 1,100,000

Table 18. Guarantees provided by the Parent in the first half of 2017: Type/ Curren Beneficiary Details Issue date Amount Issuer cy Payment guarantee Mar 17 2017 PKO BP S.A. PSE S.A. for electricity PLN 1,300 (annex) transmission contract Fiscal Administratio Customs debt payment Mar 24 2017 PKO BP S.A. PLN 4 000* n Chamber in guarantee (annex) Szczecin 5,300

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

Page 31 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise)

Table 19. Guarantees provided by the Parent as at June 30th 2017: Type/ Curren Beneficiary Details Issue date Amount Issuer cy Performance bond in open PKO BP S.A. PGE S.A. PLN Mar 8 2016 316 tender contract Fiscal Administratio Customs debt payment Mar 24 2017 PKO BP S.A. PLN 1,000* n Chamber in guarantee (annex) Szczecin Payment guarantee for Mar 17 2017 PKO BP S.A. PSE S.A. electricity transmission PLN 1,300 (annex) contract Payment guarantee for GAZ-SYSTEM PKO BP S.A. gas fuel transmission PLN Dec 1 2016 4,301 S.A. contract PKO BP S.A. Security for payment of 4,818 (standby MARSULEX contract price (flue gas USD Dec 28 2016 (USD 1,300 letter of (MET) treatment unit at EC-II thousand) credit) CHP plant) 11,735

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

As at June 30th 2017, Grupa Azoty Police Serwis Sp. z o.o., a subsidiary, had provided guarantees to PGE GiEK S.A. and Zakład Odzysku i Składowania Odpadów. Table 20. Guarantees provided by subsidiaries as at June 30th 2017 Type/ Curren Beneficiary Details Issue date Amount Issuer cy INTERRISK S.A. Performance and insurance PGE GiEK S.A. PLN Nov 16 2016 32 defects liability bond guarantee INTERRISK S.A. insurance PGE GiEK S.A. Defects liability bond PLN Sep 1 2016 4 guarantee INTERRISK S.A. Zakład Odzysku insurance i Składowania Performance bond PLN Nov 10 2016 12 guarantee Odpadów 48

As at June 30th 2017, Grupa Azoty Police Serwis Sp. z o.o. had provided the surety specified in the table below.

Table 21. Sureties provided by subsidiaries as at June 30th 2017 Type/ Beneficiary Details Currency Issue date Amount Issuer Agreement for security Security for insurance assignment of specified INTERRISK S.A. guarantees provided PLN 21.03.2011 1,881 items by INTERRISK S.A. 1,881

4.4. Shareholding structure Below are listed shareholders holding directly, or indirectly through subsidiaries, at least 5% of total voting rights at the General Meeting as at the date of this Report, along with information on the

Page 32 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise) number of shares held by such entities, their respective ownership interests, the number of voting rights held, and their share in total voting rights at the General Meeting.

Table 22. Shareholding structure as at the date of this Report % of total Ownership Voting Shares voting interest (%) rights Shareholder rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 11,956,000 15.94 11,956,000 15.94 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other 3,176,678 4.24 3,176,678 4.24 Total 75,000,000 100.00 75,000,000 100.00

According to the list of persons entitled to participate in the General Meeting called for June 12th 2017 provided to the Parent by the CSDP, OFE PZU Złota Jesień registered 11,956,000 shares, i.e. the shareholder’s interest in the Parent’s share capital increased to 15.94%.

4.5. Company shares held by management and supervisory personnel As at the reporting date (June 30th 2017) and as at the date of issue of this report, none of the members of the Parent’s Supervisory Board held any shares in the Parent. Since the date of issue of the previous report, there have been no changes in holdings of Parent shares by the supervisory personnel. Table 23. Company shares held by Parent’s supervisory personnel Number of shares / voting rights Balance at As at Balance at June As at the date January 1st 2017 30th 2017 of this Report Wojciech Wardacki, Ph.D. - - - Tomasz Panas - - - Włodzimierz Zasadzki, Ph.D. - - - Anna Tarocińska* 1 1 1 * From the date of appointment to the Management Board, i.e. March 3rd 2017. Before that date, as a member of the Supervisory Board.

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

4.6. Composition of the Management Board and the Supervisory Board Parent’s Management Board As at January 1st 2017, the composition of the Management Board was as follows:  Wojciech Wardacki, Ph.D., President,  Tomasz Panas, Vice President,  Włodzimierz Zasadzki, Ph.D., Vice President.

On March 3rd 2017, the Supervisory Board appointed Ms Anna Tarocińska as a Member of the Management Board elected by the employees. As at the date of this Report, the Parent’s Management Board consisted of:  Wojciech Wardacki, Ph.D., President,  Tomasz Panas, Vice President,  Włodzimierz Zasadzki, Ph.D., Vice President,

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 Anna Tarocińska, Member (representing Company employees). Powers and responsibilities of the Parent’s Management Board In accordance with the Commercial Companies Code and the Articles of Association, the Management Board is the Company’s executive body responsible for managing its affairs and representing it in and out of court. The Management Board, headed by the President, manages the Company and represents it before third parties. All matters connected with the management of the Company’s affairs which are not reserved under the law or the Articles of Association for the General Meeting or the Supervisory Board, fall within the scope of powers and responsibilities of the Management Board. The Management Board operates in compliance with effective laws and is accountable for the management of the Company’s affairs before the Supervisory Board and the General Meeting. Division of powers and responsibilities within the Management Board Pursuant to Supervisory Board’s Resolution No. 26/VI/13 on approval of amendments to the Rules of Procedure for the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A., the division of powers and responsibilities for the supervision of the Company’s individual organisational areas is each time determined and approved by the Company’s Management Board by way of a resolution. As at the date of issue of this Report, the division of powers and responsibilities of the Management Board members is governed by:  Management Board Resolution No. 575/VII/17 of March 8th 2017concerning the division of powers and responsibilities among the Management Board members with regard to the supervision of organisational areas and business processes,  Organisational Rules adopted by the Management Board in Resolution No. 9/VI/12 of July 6th 2012, as amended (most recently amended by Management Board Resolution No. 656/VII/17 of May 12th 2017), approved by the Supervisory Board in Resolution No. 108/VII/17 of May 22nd 2017. Pursuant to Management Board Resolution No. 575/VII/17 of March 8th 2017, the supervisory powers and responsibilities are divided among the Company’s Management Board members as follows:  Wojciech Wardacki, Ph.D. − President of the Management Board, Chief Executive Officer: o Central Dispatch Division, o Fertilizers Business Unit, o Pigments Business Unit, o Internal Audit Division, o Marketing Division, o Strategy and Development Department, o Fertilizer Sales Department, o Human Resources and Management Department, o Public Relations Office, o Security Office, o Safety Department.  Włodzimierz Zasadzki, Ph.D. − Vice President of the Management Board: o Finance Department, o Strategic Procurement Department.  Tomasz Panas−Vice President of the Management Board: o Nitro Business Unit, o Logistics Centre o Power Centre o Infrastructure Centre.  Anna Tarocińska − Member of the Management Board: o Technical Safety Department, o Laboratory Analysis Centre. As regards the division of duties among the Management Board members, the resolution also sets out their powers and responsibilities in the coordination of business processes. The Management Board members supervise and coordinate the following business processes:  Wojciech Wardacki, Ph.D. − President of the Management Board, Chief Executive Officer: o Strategic management,

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o Comprehensive customer support, o Human resources management, o Marketing.  Włodzimierz Zasadzki, Ph.D. − Vice President of the Management Board: o Financial management, o Financial controlling, o Availability of feedstocks and raw materials.  Tomasz Panas−Vice President of the Management Board: o Logistics support, o Production asset management, o Investment project management.  Anna Tarocińska − Member of the Management Board: o Technical and environmental safety. The President of the Management Board, assisted by the unit responsible for providing support to the Company’s governing bodies, performs ongoing supervision of the implementation of resolutions of the Parent’s Management Board, Supervisory Board, and General Meeting. The President of the Management Board, or in his absence the Vice-President designated by the President, convenes, determines the agenda of and presides over Management Board meetings. In accordance with the Organisational Rules of Grupa Azoty Zakłady Chemiczne Police S.A., President of the Management Board – Chief Executive Officer exercises general supervision of the Company’s operations and is assisted by directors of departments, business units and centres, as well as by managers of other organisational units. Powers and responsibilities of the President of the Management Board - Chief Executive Officer include:  general supervision and coordination of Company’s activities,  promoting a good image of the Company as a corporate citizen,  managing the work of the Company’s Management Board and presiding over its meetings,  performing the Company’s responsibilities as an employer within the bounds of the Polish Labour Code,  supervising the restructuring and privatisation processes at the Company and its subsidiaries,  supervising and coordinating business processes specified in the Management Board Rules of Procedure, and supervising organisational units that report directly to the President of the Management Board – Chief Executive Officer,  approving internal audit, business control and stocktaking plans, as well as making decisions on their implementation, and  representing the Company in and out of court, jointly with another Management Board member or proxy. Supervisory Board As at January 1st 2017, the composition of the Company’s Supervisory Board was as follows: • Dariusz Hac − Chairman, • Joanna Habelman − Deputy Chairwoman, • Bożena Licht − Secretary, • Agnieszka Dąbrowska − Member, • Mirosław Kozłowski − Member, • Andrzej Malicki − Member (representing Company employees), and • Anna Tarocińska − Member (representing Company employees), • Maria Więcek − Member (representing Company employees). On January 26th 2017, the Extraordinary General Meeting removed Mr Dariusz Hac from the Supervisory Board and appointed Ms Joanna Habelman as Chairwoman of the Supervisory Board. On February 6th 2017, the Supervisory Board appointed Mr Mirosław Kozłowski as Deputy Chairman of the Board.

With effect from March 3rd 2017, Ms Anna Tarocińska resigned as member of the Supervisory Board after she had been appointed to the Company’s Management Board.

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Therefore, as at the date of this Report the composition of the Supervisory Board, consisting of six members, was as follows: • Joanna Habelman − Chairwoman, • Mirosław Kozłowski − Deputy Chairman, • Bożena Licht − Secretary, • Agnieszka Dąbrowska − Member, • Andrzej Malicki − Member (representing Company employees), and • Maria Więcek − Member (representing Company employees).

The Supervisory Board operates on the basis of:  Commercial Companies Code of September 15th 2000 (Dz.U. No. 94, item 1037, as amended),  Act on Commercialisation and Privatisation,  Accounting Act,  Company Articles of Association, and  Rules of Procedure for the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. On November 23rd 2009, the Supervisory Board established an Audit Committee (Resolution No. 342/IV/09) to improve the effectiveness of the Board’s work and to strengthen control over the Parent and the Group. The Audit Committee is an advisory body acting collectively within the Supervisory Board. As at January 1st 2017 and as at the date of this Report, the Committee members were:  Joanna Habelman − Chairwoman of the Audit Committee,  Agnieszka Dąbrowska – Secretary of the Audit Committee,  Mirosław Kozłowski − Member of the Audit Committee.

The Audit Committee’s tasks include in particular:  monitoring of the financial reporting process,  monitoring of the effectiveness of internal financial control, internal audit and risk management systems in place at the Company,  monitoring of financial audit activities,  control and monitoring of auditor’s fees,  developing a policy for the provision by the auditor, its related entities or a member of its network, of additional non-audit services,  assessing the independence of the auditor for the purposes of approving the provision by the auditor of the permitted non-audit services,  developing policies and detailed procedures for selection of an audit firm and recommending at least two audit firms to the Supervisory Board. Detailed rules of operation of the Audit Committee are set out in the Act of May 11th 2017 on statutory auditors, audit firms and public oversight, as well as in the Rules of Procedure for the Audit Committee approved by Resolution No. 341/IV/09 of the Parent’s Supervisory Board of November 23rd 2009, and amended by Resolution No. 10/VI/2013 of the Supervisory Board of July 31st 2013. Currently, the process of implementing the provisions of the new Act is being implemented in the Rules of the Issuer’s Audit Committee. 4.7. Environmental protection The Company constantly monitors its ability to meet the environmental requirements imposed by relevant laws. The Company participates in social consultations of draft legal acts.

Verification of CO2 emission volumes With respect to greenhouse gas emissions, the Company operates based on emission allowance decisions issued by the Marshal Office of the Province of Szczecin under the Act on Trading System for Greenhouse Gas Emission Allowances, dated June 12th 2015. In the first half of 2017, the Company fulfilled its obligations under the Act in a timely manner; it prepared, verified and submitted the annual EU ETS CO2emission reports and the 2016 technical, emission and production report to the National Centre for Emissions Balancing and Management (KOBiZE). The reports were accepted by KOBIZE with no reservations.

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Purchases of emission allowances for 2016, including permitted annual EUA/CER swaps, were settled for each of the Company’s EU ETS installations, and all necessary settlement transactions with respect to 2016 were executed. All allowances for the year were redeemed, as confirmed by the balances of EU emission accounts maintained for each installation. Energy certificates On the basis of the Act on renewable energy sources, electricity purchased for the Company’s own needs and for resale to final customers is subject to the obligation to purchase and redeem certificates of origin (green and blue certificates) or to pay a substitute fee. In addition, pursuant to the Energy Law, this type of energy is also subject to the obligation to purchase and redeem cogeneration certificates (yellow, violet and red certificates) or to pay a substitute fee. Further, pursuant to the Energy Efficiency Act, electricity and heat sold to end users and natural gas purchased on the Polish Power Exchange are subject to the obligation to purchase and redeem energy efficiency certificates (white certificates) or to pay a substitute fee. For the purpose of fulfilling these obligations for the current year, the Company recognises provisions, and funds are earmarked in the account held with the Brokerage House providing relevant services to the Company for the purchase of natural gas on the PPX. The 2016 obligations under the RES Act and the Energy Law were fully satisfied through acquisition and redemption of property rights (the Company surrendered its own red certificates for redemption). The obligation under the Energy Efficiency Act has been met through redemption of own certificates, while the requirement to purchase gas on the PPX was complied with by authorising DM BOŚ S.A. to redeem the energy efficiency property rights held by the Company in the account in the Property Rights Register maintained by the PPX. The Company received a confirmation that all property rights submitted for redemption in respect of 2016 had been redeemed, except for the energy efficiency property rights resulting from the purchase of natural gas on the PPX in the fourth quarter of 2016, which were yet to be redeemed. REACH Regulation (EC) No. 1907/2006 of the European Parliament and of the Council on REACH has introduced an EU-wide requirement to register manufactured or imported chemical substances and prepare health and environmental safety assessments for those chemical substances. The regulation provides mechanisms to prohibit or restrict the production and use of particularly dangerous substances. It also requires manufacturers and importers to advise downstream users of the conditions of their safe use on their own or as a constituent of other products, and specifies the design of the related documentation (safety data sheet). The regulation also requires downstream users to handle chemicals in compliance with supplier instructions. The Company has fulfilled the obligation to register all substances it manufactures. The Company has prepared and published safety data sheets (or equivalent documents) in accordance with REACH requirements for all marketed products, and updates those documents on an ongoing basis as required. The Company fulfils its obligations as a downstream user of chemical substances on a regular basis. The Parent does not produce any chemicals whose production or use would be banned or restricted. The Company does not manufacture chemical substances in quantities from 10 to 100 tonnes per year covered by the registration requirement in 2012, or in quantities from 1 to 10 tonnes per year covered by the registration requirement in 2018. In 2014, a substance manufactured by the Company, titanium dioxide (a base component of TYTANPOL pigments), was entered in the list of substances to be assessed under the Community Rolling Action Plan (CoRAP). An assessment based on the updated registration documents will is to be made in 2018. In 2015, the European Chemicals Agency (ECHA) assessed the formal compliance of titanium dioxide registration documents with the REACH regulation and issued a decision specifying the required amendments in the documentation. The lead registrant appealed against the decision and requested a review by the ECHA Board of Appeals. On March 2nd 2017, the Board of Appeals dismissed the ECHA’s decision as unfounded. As a result, amendments in the registration documents will not be necessary, and no additional costs will be incurred on that account. In the first half of 2016, the European Chemical Agency (ECHA) commenced public consultation on a proposal to declare titanium dioxide as a category 1B carcinogen (Carc. 1B). As a member of the Titanium Dioxide Manufacturers Association (TDMA) and the Titanium Dioxide Industry Consortium

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(TDIC), on July 13th 2016 the Company submitted a statement to the ECHA indicating lack of evidence sufficient to classify TiO2 as Carc. 1B. Further consultations are ongoing. Fertilizer Regulation In March 2016, a draft Regulation of the European Parliament and of the Council laying down the rules on the making available on the market of CE marked fertilizing products was published. The new document is to fully replace Regulation (EC) No. 2003/2003 relating to fertilizers, which is currently in force. The draft, among other things, introduces tight limits on heavy metal content in fertilizers, changes the minimum level and tolerance for variations of nutrient content in solid, liquid, mineral, organic and organo-mineral fertilizer products. It also imposes restrictions on component materials used in fertilizer production. The legislative procedure is still pending at EU institutions. Administrative decisions The Company operates based on an integrated permit for operation of process units, granted on January 9th 2014, as amended. The last amendment to the integrated permit was made by decision of the Marshal of the Province of Szczecin of September 21st 2016, Ref. No. WOŚ.II.7222.6.7.2016.MG. The Company reviews the relevance of its integrated permit on an ongoing basis; in the first half of 2017 it requested that the Marshal Office amend the permit. Compliance with legal requirements In the first half of 2017, the Company complied with the integrated permit and duly observed its environmental reporting obligations for 2016. The Company performs regular assessment of the risk of soil, land and groundwater contamination with hazardous substances from the Company’s units and installations. The ‘Assessment of soil, land and groundwater contamination risk’, performed in line with Scheme No. SP-O-P06-01, did not reveal any risk of soil or groundwater contamination in the first half of 2017. Due to the change in the operating strategy involving the abandonment of construction of a new CCGT unit at the EC II CHP plant, the Company submitted a request to the Ministry of the Environment for its delisting from the National Investment Plan (KPI). External inspections In the first half of 2017, two external environmental inspections were carried out. On May 11th 2017, an inspection by the Provincial Inspectorate for Environmental Protection (WIOŚ) in Szczecin was completed. Its purpose was to verify compliance with environmental regulations in the area of gas and dust emissions and assess the correctness of emission-related transactions executed as part of the Transitional National Plan. It was found that the maximum sulfur dioxide emission limit set out in the TNP for the EC II CHP plant was exceeded by 3.74% and that construction of the DeSOx (flue-gas desulphurisation) unit at the EC II CHP plant was not completed in 2016. The Company provided additional explanations regarding the upgrade of the EC II CHP plant units to ensure compliance with the legal requirements. No post-inspection recommendations were issued. On June 19th 2017, a joint inspection by the Provincial Inspectorate for Environmental Protection (WIOŚ), the National Labour Inspectorate (PIP) and the National Fire Service (PSP) was carried out under the signed declaration of intent to improve work safety, fire safety and environmental protection standards for the chemical industry. The purpose of the inspection was to verify the operation of the major industrial accident prevention system. No irregularities were found. Safety management In the area of occupational health and safety, during the reporting period there were no major events of a non-recurring nature which could materially affect the Company’s financial performance.

5. Other information Management Board’s position on the achievement of forecasts As no forecasts for 2017 have been published, the position of the Parent’s Management Board concerning achievement of such forecasts is not presented.

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Parent’s branches (divisions) The Company does not operate any branches or divisions outside of its principal place of business. Shares, share issues In the reporting period, the Parent did not issue, redeem or repay any debt or equity securities. Litigation The Company is not party to any proceedings concerning liabilities or receivables whose value would represent 10% or more of the Company’s equity and which would meet the materiality criteria defined in the Minister of Finance’s Regulation on current and periodic information, dated February 19th 2009 (consolidated text in Dz.U. of 2014, item 133, as amended). The total value of all pending court proceedings does not exceed 10% of the Group’s equity.

Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 contains 40 pages.

Signatures of the Members of the Parent’s Management Board

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

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

Police, August 21st 2017

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