Directors’ Report on the operations of Zakłady Chemiczne Police S.A. and the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019

Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

This Directors’ Report presents key developments that occurred in the 12 months ended December 31st 2019 at the Grupa Azoty Zakłady Chemiczne Police Group and Grupa Azoty Zakłady Chemiczne Police S.A., the Group’s Parent, including results of their operations, as well as a description of relevant risks and threats. It also presents financial and non-financial indicators if material for the assessment of the Group’s and the Parent’s condition, as well as additional explanations on the amounts presented in the consolidated and separate financial statements.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 2 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Contents 1. General information about the Group ...... 5 1.1. Organisation and structure ...... 5 1.2. Changes in the organisational structure ...... 8 1.3. Organisational and equity ties ...... 8 2. Rules of management of the Group ...... 9 2.1. Parent’s organisational chart ...... 9 2.2. Changes in key management policies ...... 9 2.3. The Group’s workforce ...... 10 3. Business overview ...... 11 3.1. Business activities ...... 11 3.2. Overview of key products ...... 13 3.3. Sales markets and supply sources ...... 14 3.4. Seasonality of operations ...... 16 3.5. Significant agreements ...... 16 3.6. Significant events ...... 17 4. Growth policy and strategy ...... 18 4.1. Growth strategy and directions ...... 18 4.2. Growth prospects and market strategy ...... 19 4.3. Main capex projects in and abroad ...... 20 4.4. Key equity investments ...... 27 4.5. Feasibility of investment plans ...... 27 4.6. Significant R&D achievements ...... 27 5. Current financial condition and assets ...... 28 5.1. Assessment of factors and one-off events with a material impact on operations and financial performance ...... 28 5.2. Market overview ...... 29 5.3. Key financial and economic data ...... 36 5.3.1. Segments’ financial results ...... 37 5.3.2. Operating expenses ...... 39 5.3.3. Structure of assets, equity and liabilities ...... 40 5.3.4. Financial ratios ...... 43 5.4. Management of capital andassets ...... 45 5.5. Bank deposits ...... 45 5.6. Borrowings ...... 45 5.7. Loans advanced ...... 47 5.8. Sureties and guarantees received and issued ...... 47 5.9. Material off-balance-sheet items ...... 49 5.10. Financial instruments ...... 49 5.11. Expected financial condition ...... 49 6. Risk, threats and growth prospects ...... 50 6.1. Significant risk factors and threats ...... 50 6.1.1. Strategic equity investments and growth initiatives ...... 50 6.1.2. Laws, regulations and compliance ...... 51 6.1.3. Supply of key raw materials and feedstocks ...... 53 6.1.4. Production ...... 53 6.1.5. Sales and marketing...... 55 6.1.6. Capital and financial risk management ...... 57 6.2. Grupa Azoty Group’s significant external and internal growth factors ...... 58 7. Parent’s equity and other securities and its major shareholders ...... 61 7.1. Total number and par value of Parent shares, holdings of Parent shares by supervisory and management personnel, and interests of such persons in the Parent’s related entities ...... 61 7.2. Treasury shares held by the Parent, Group companies and persons acting on their behalf ..... 61 7.3. Key information on Parent shares ...... 61 8. Statement of compliance with corporate governance standards ...... 63 8.1. Corporate governance code applicable to the Parent and the place where the text of the code is available to the public ...... 63 8.2. Declaration of applying the recommendations contained in the ‘Best Practice for WSE Listed Companies 2016’ ...... 64

Grupa Azoty Zakłady Chemiczne Police S.A. Page 3 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

8.3. Features of the internal control and risk management systems used by the Company ...... 68 8.4. Management standards and systems ...... 69 8.5. Shareholding structure ...... 70 8.6. Special control powers of securities holders ...... 70 8.7. Restrictions on voting rights ...... 71 8.8. Restrictions on the transferability of securities ...... 71 8.9. Rules governing appointment and removal from office of management personnel; powers of such personnel, including their authority to decide on the issue or buy-back of shares ...... 71 8.10. Rules governing amendments to the Parent’s Articles of Association ...... 72 8.11. Operation of the General Meeting ...... 72 8.12. Composition, change and operation of the Company’s management and supervisory bodies ...... 74 8.13. Diversity policy ...... 80 8.14. Remuneration policy ...... 81 8.15. Agreements between the Parent and Management Board members ...... 84 8.16. Sponsorship, charitable or similar activities ...... 84 8.17. Report on entertainment expenses, legal costs, marketing costs, public relations and social communication expenses, and management consultancy fees, and a report on compliance with best practices issued pursuant to the Act on State Property Management ...... 86 9. Other material information and events ...... 87 9.1. Qualified auditor ...... 87 9.2. Environmental performance ...... 87 9.3. Awards and distinctions ...... 88 10. Other information ...... 89

Grupa Azoty Zakłady Chemiczne Police S.A. Page 4 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

1. General information about the Group 1.1. Organisation and structure As at December 31st 2019, the Grupa Azoty Zakłady Chemiczne Police Group (the “Grupa Azoty POLICE Group”, the “Group”) comprised Grupa Azoty Zakłady Chemiczne Police S.A. (the “Parent”, the “Company”), and: • eight subsidiaries (in which Grupa Azoty Zakłady Chemiczne Police S.A. held ownership interests above 50%), including two company in liquidation, • two associates (in which the Company held ownership interests below 50%), including one company in liquidation bankruptcy. Table 1. Parent’s equity interests in subordinated entities at December 31st 2019

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

ul. Kuźnicka 1, Grupa Azoty Police Serwis Sp. z o.o. 9,618 100.00 72-010 Police, Poland ul. Kuźnicka 1, Koncept Sp. z o.o. 512 100.00 72-010 Police, Poland Supra Agrochemia Sp. z o.o. ul. Monopolowa 6, 19,721 100.00 51-501 Wrocław, Poland ul. Kuźnicka 1, Grupa Azoty Transtech Sp. z o.o. 9,783 100.00 72-010 Police, Poland Grupa Azoty XOF Route de Ngor Villa No. 12, Africa S.A. w likwidacji (in 132,000 99.99 Dakar, liquidation) thousand Zarząd Morskiego Portu Police Sp. z ul. Kuźnicka 1, o.o. 32,642 99.91 72-010 Police, Poland

Infrapark Police S.A. ul. Kuźnicka 1, 14,986 54.43 w likwidacji (in liquidation) 72-010 Police, Poland ul. Kuźnicka 1, Grupa Azoty Polyolefins S.A. 467,339 53.00 72-010 Police, Poland budchem Sp. z o.o. ul. Moczyńskiego 8/10, w upadłości likwidacyjnej (in 1,201 48.96 70-101 Szczecin, Poland liquidation bankruptcy) ul. Kuźnicka 6, Kemipol Sp. z o.o. 3,445 33.99 72-010 Police, Poland

Grupa Azoty Zakłady Chemiczne Police S.A. Page 5 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 1. Structure of the Group as at December 31st 2019

Note: the percentage amounts are the Parent’s ownership interest in share capital.

The Parent – Grupa Azoty Zakłady Chemiczne Police S.A. The Company has for decades been a leading European manufacturer of and one of the largest Polish chemical companies. The Company’s advantages include a titanium white unit of a type unique in Poland, the size of its , phosphoric acid and sulfuric acid production, and the strong position in the market for compound mineral fertilizers. Internationally, the Company is appreciated not only for its production and sales volumes, but also for contributing to the development of the and global agriculture. The Company pays due regard to CSR matters, engaging in projects that support local communities and regional development. Liaising with local authorities, Grupa Azoty Zakłady Chemiczne Police S.A. supports vocational education, with a particular focus on professions useful to the Company. The Company has also established links with higher education institutions, sharing expertise with students majoring in chemistry, environmental protection, management and marketing. Upon graduation, some of them move on to become Company employees. Group subsidiaries: Grupa Azoty POLICE Serwis Sp. z o.o. The company was registered on March 15th 2002 under No. 0000099823 under the name of Remech Grupa Remontowo-Inwestycyjna Sp. z o.o. In 2015, it acquired Automatika sp. z o.o. and changed its name to Grupa Azoty Police Serwis Sp. z o.o. The company’s business includes overhauls and project execution in the mechanical and construction industries (construction of systems and apparatuses, including those made of , maintenance services, workshop services, treatment of metals, and technical supervision services), project execution and technical and engineering services in the areas of automation and power engineering, repairs of control and instrumentation equipment and power generation plant and equipment, plant engineering in automatics and power generation, including plant engineering in process control and visualisation systems. Koncept Sp. z o.o. The subsidiary was registered on September 6th 2001 under No. 0000041533 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. Its business consists in the provision of design services for the construction, assembly, mechanical, electrical, automation and measurement, and technological industries (including preparation of expenditure and investment

Grupa Azoty Zakłady Chemiczne Police S.A. Page 6 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) estimates). The company specialises in design work for the chemical industry (manufacture of ammonia, , compound fertilizers, phosphoric and sulfuric acid, and titanium pigment), as well as printing and binding services. On January 29th 2020, the company was merged with PROZAP sp. z o.o. (the acquirer). For more details, see section 1.2. Supra Agrochemia Sp. z o.o. The subsidiary was registered in the Commercial Register on December 29th 2000 And later re- registered in the National Court Register under No. 00000138374 by the District Court for Wrocław- Fabryczna of Wrocław, 6th Commercial Division of the National Court Register. Its business comprises revitalising post-industrial sites owned by the company and preparing them for the purposes of redevelopment projects. Grupa Azoty Transtech Sp. z o.o. The subsidiary was registered on April 2nd 2001 under No. 00003660 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company provides transport services (minibus transport and goods transport on lorries with load capacity of up to 24 tonnes – dump cars and open load lorries meeting the ADR requirements), plant and equipment services (mobile cranes with lifting capacity of up to 65 tonnes, diggers, loaders, bulldozers, and special-use vehicles for waste disposal in containers, sanding vehicle, low-floor units), workshop services (repair of battery- electric trucks, stackers, passenger cars, delivery vans, lorries, loaders, diggers, bulldozers and mobile cranes), as well as periodic check-ups. Grupa Azoty Africa S.A. w likwidacji (in liquidation) The company has been in liquidation since May 12th 2017. Zarząd Morskiego Portu Police Sp. z o.o. The subsidiary was registered on December 13th 2004 under No. 0000223709 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The Municipality of Police holds a minority interest in the company. The company’s business comprises sea port operation, port construction, property management, research work, sea and inland shipping, and coastal water transportation services. The subsidiary is a port authority within the meaning of the Act on Sea Ports and Harbours. Infrapark Police S.A. w likwidacji (in liquidation) On January 9th 2020, INFRAPARK Police S.A. w likwidacji (in liquidation) was deleted from the Business Register. Grupa Azoty Polyolefins S.A. The subsidiary was registered on September 24th 2015 under No. 0000577195 under the name of PDH POLSKA S.A. by the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register. The company’s purpose is to construct a PDH unit for propylene production with related infrastructure, auxiliary systems and inter-unit connections, and extension of the Police sea port facilities to include a handling terminal for chemicals that would provide the required logistics infrastructure for receiving and storing the raw material. On October 8th 2019, the company’s name was changed to Grupa Azoty Polyolefins S.A. Associates: Budchem Sp. z o.o. w upadłości likwidacyjnej (in liquidation bankruptcy) The company was registered in the Commercial Register on October 14th 1999 and later re-registered in the National Court Register under No. 0000135223 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The majority shareholder is WB Technika Sp. z o.o. The company is in liquidation bankruptcy and does not trade. Kemipol Sp. z o.o. The company was registered in the Commercial Register on December 18th 1990 and later re- registered in the National Court Register under No. 0000119127 by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The majority shareholder is Kemira Kemi AB from Sweden. The remaining shares are held by the Company and Bank Ochrony Środowiska S.A. The company’s business consists in the production of coagulants for water purification and wastewater treatment. Services related to designing the process of chemical treatment of drinking, industrial and

Grupa Azoty Zakłady Chemiczne Police S.A. Page 7 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) waste water, selection and supply of chemical dosing equipment, optimisation of the water treatment process, and restoration of lakes.

1.2. Changes in the organisational structure Merger of subsidiary Koncept Sp. z o.o. January 29th 2020 saw the merger of subsidiary Koncept Sp. z o.o. of Police (the acquiree) with PROZAP Sp. z o.o. of Puławy (the acquirer). As a result of the merger, the Company acquired 131 shares in PROZAP Sp. z o.o. in exchange for 1,023 shares in Koncept Sp. z o.o. and holds a 7.35% interest in the share capital of PROZAP Sp. z o.o. Liquidation of subsidiary Infrapark Police S.A. w likwidacji (in liquidation) Following completion of the liquidation procedure, on July 18th 2019 the liquidators of INFRAPARK Police S.A. filed an application with the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, to delete the company from the Business Register. On January 9th 2020, INFRAPARK Police S.A. w likwidacji (in liquidation) was deleted from the Business Register. Change of subsidiary’s name On August 27th 2019, the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register, registered the new name of Transtech Usługi Sprzętowe i Transportowe Spółka z ograniczoną odpowiedzialnością. Pursuant to a resolution of the Extraordinary General Meeting of June 7th 2019, the new name of the company is Grupa Azoty Transtech Spółka z ograniczoną odpowiedzialnością. Change of subsidiary’s name On October 8th 2019, the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register, registered a new name of PDH Polska Spółka Akcyjna. Pursuant to a resolution of the Extraordinary General Meeting of September 30th 2019, the new name of the company is Grupa Azoty Polyolefins Spółka Akcyjna.

1.3. Organisational and equity ties As at December 31st 2019, the Parent’s shares in total voting rights at the General Meetings of its subsidiaries and associates were equal to its respective ownership interests in these companies.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 8 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

2. Rules of management of the Group 2.1. Parent’s organisational chart Figure2. Parent’s organisational chart as at the issue date of this Report

The Managemen President of the Management Board, Chief Executive Officer

GR Technology GB Security GO Public GD Central GK Internal Audit Development Office Relations Office Dispatch Division Division Office

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

GS Tendering GX Controlling GW Corporate Agro Department Department Sales Department

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

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

Organisational changes at the Parent until the issue date of this Report: On January 1st 2019, a Technical Department was established, reporting directly to the President of the Management Board, CEO.

2.2. Changes in key management policies Significant management policy changes made in the reporting period included: • Amendments to the Company’s Articles of Association (Resolution No. 4 of the Extraordinary General Meeting of September 23rd 2019 to increase the Company’s share capital by way of a rights issue, conduct a public offering of new shares, set November 7th 2019 as the cum-rights date, convert into book-entry form and seek admission and introduction of the pre-emptive rights, allotment certificates and new shares to trading on the regulated market operated by the Warsaw Stock Exchange, and amend the Company’s Articles of Association, as well as Resolution No. 4 of the Extraordinary General Meeting of November 7th 2019 to amend Grupa Azoty Zakłady Chemiczne Police S.A.’s Articles of Association). • Change of the rules for disposal of non-current assets of Grupa Azoty Zakłady Chemiczne Police S.A. of Police (Resolution No. 6 of the Extraordinary General Meeting of November 7th 2019 to amend Resolution No. 4 of the Extraordinary General Meeting of Grupa Azoty Zakłady Chemiczne Police S.A. of May 18th 2018 to adopt the rules for disposal of non-current assets of Grupa Azoty Zakłady Chemiczne Police S.A. of Police).

Grupa Azoty Zakłady Chemiczne Police S.A. Page 9 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

2.3. The Group’s workforce Table 2. Number of employees at the Grupa Azoty Zakłady Chemiczne Police Group As at As at Employee group Dec 31 2019 Dec 31 2018 Women Men Women Men Blue collar 272 2,140 266 2,157 White collar 407 714 396 695 Total 679 2,854 662 2,852

Table 3. Number of employees at the Parent As at As at Employee group Dec 31 2019 Dec 31 2018 Women Men Women Men Blue collar 270 1,544 264 1,547 White collar 290 456 289 453 Total 560 2,000 553 2,000

Table 4. Number of employees at consolidated subsidiaries* As at As at Employee group Dec 31 2019 Dec 31 2018 Women Men Women Men Blue collar 2 596 2 610 White collar 117 258 107 242 Total 119 854 109 852 * excluding the Parent

Table 5. Number of Group employees: annual average and at the end of 2019 Employee group Annual average At year end

Women Men Women Men Blue collar 270 2,159 272 2,140 White collar 402 702 407 714 Total 672 2,861 679 2,854

Table 6. Number of employees at the Parent: average for the year and as at the end of 2019 Employee group Annual average At year end

Women Men Women Men Blue collar 268 1,549 270 1,544 White collar 290 456 290 456 Total 558 2,005 560 2,000

Table 7. Number of employees at consolidated subsidiaries: annual average and at the end of 2019* Employee group Annual average At year end

Women Men Women Men Blue collar 2 610 2 596 White collar 112 245 117 258 Total 114 855 119 854

* excluding the Parent

Table 8. Employee turnover at the Group between January 1st and December 31st 2019 2019 Women Men

Grupa Azoty Zakłady Chemiczne Police S.A. Page 10 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

New hires 53 215 Layoffs -36 -213 Total 17 2

Table 9. Employee turnover at the Parent between January 1st and December 31st 2019 2019 Women Men New hires 33 122 Layoffs -26 -122 Total 7 0

Table 10. Structure of the Group’s workforce by education Total Item Year Higher Secondary Vocational Primary workforce Number of employees 2019 3,533 1,106 1,421 807 199 Number of employees 2018 3,514 1,060 1,395 856 203

Table 11. Structure of the Parent’s workforce by education Total Item Year Higher Secondary Vocational Primary workforce Number of employees 2019 2,560 795 1,119 522 124 Number of employees 2018 2,553 780 1,074 564 135

Table 12. Structure of the Group’s workforce by length of service above 20 Item Year up to 5 years 6−10 years 11−20 years years 625 345 858 1705 Number of employees 2019 18% 10% 24% 48% 622 315 779 1,798 Number of employees 2018 18% 9% 22% 51%

Table 13. Structure of the Parent’s workforce by length of service above 20 Item Year up to 5 years 6−10 years 11−20 years years 330 272 638 1,320 Number of employees 2019 13% 11% 25% 51% 341 241 578 1,393 Number of employees 2018 13% 9% 23% 55%

3. Business overview 3.1. Business activities The Group’s performance is strongly correlated with the market environment of the Parent. This correlation has been present since the inception of the Company’s business. The Company is a leading manufacturer of chemicals in the region and a significant one on the EU market. The Parent’s operations comprise two main business segments – Fertilizers and Pigments, as well as other activities. Another business segment identified within the Group is Polymers, covering the subsidiary Grupa Azoty Polyolefins S.A., which is responsible for the ‘Polimery Police’ project involving the construction of a propylene and polypropylene production unit along with auxiliary infrastructure. Currently, the Parent’s operations are conducted through three business units and four support centres, including: • Fertilizers Business Unit, • Nitro Business Unit,

Grupa Azoty Zakłady Chemiczne Police S.A. Page 11 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

• Pigments Business Unit, • Power Centre, • Logistics Centre, • Infrastructure Centre, • Laboratory Analysis Centre. Fertilizers Business Unit The Fertilizers Business Unit is the largest organisational unit within the Company in terms of revenue and production volumes. It produces mainly compound NP, NPK and NS fertilizers, as well as phosphoric and sulfuric acids. The Parent is the largest manufacturer of these compound fertilizers and acids in Poland and one of the largest in Europe. Products manufactured by the Fertilizers Business Unit are sold in Poland and on foreign markets. Its main products are POLIFOSKA® and POLIDAP®, fertilizer brands widely recognised in Poland. The POLIFOSKA® brand has become a generic name for compound fertilizers in Poland, recognised for its superior quality and functional properties. The POLIFOSKA brand has a high concentration of pure constituents, chemical uniformity of fertilizer grains and high assimilability of constituents. Nitro Business Unit The Nitro Business Unit is one of Poland’s leading manufacturers of ammonia and urea. Its products are sold both on the domestic and export markets. Urea is sold for agricultural and technological applications. An important business line within the unit is the manufacture and sale of urea solutions: 32.5% – NOXy® (AdBlue®), and 40% – Pulnox®. NOXy® (AdBlue®) is used in the automotive industry to reduce oxide emissions from diesel engines. A steady rise in the consumption of NOXy® is expected in Europe in the coming years given the increasingly stringent regulations aimed at reducing atmospheric emissions of exhaust fumes. Pulnox® is also used as a reducing agent in vehicle emissions control technologies. It is widely used in large energy facilities which generate harmful substances, including nitrogen and sulphur oxides, when burning fossil fuels. Thanks to Pulnox®, power and heat producers are able to meet the EU standards on industrial emissions. The range of products offered by the Nitro Business Unit is supplemented by ammonia water (Likam®). The products specified above are manufactured at production units which are constantly modernised and upgraded, with due care taken to ensure occupational safety and environmental protection. Pigments Business Unit The principal activity of the Pigments Business Unit is the manufacture and sale of titanium white and related intermediate products: iron sulfate and hydrolytic acid. Being the leader in the domestic market of titanium white, the Unit also operates a well-developed export network. Titanium dioxide- based pigments, marketed under the TYTANPOL® brand, are manufactured using a state-of-the-art technology which meets stringent environmental requirements. They are widely used, lending excellent aesthetic and protective properties to pigmented products. Titanium white is used, among others, in the production of paints and varnishes, printing inks, plastics, as well as paper and laminates. The consistently high product quality and professional advice on product use have been recognised − the Unit has received many awards and honours. Power Centre The Power Centre produces heat (in the form of hot steam), electricity and feedwater, distributes energy utilities and compressed air, and purchases electricity and heat (steam) for the Company’s needs. It operates state-of-the-art generating units, ensuring reliable supplies of heat, electricity and feedwater. The Centre also sells electricity, steam and heating water as well as fly ash to external customers. Logistics Centre The Logistics Centre is responsible for shipping, transport, packaging and distribution activities and for the operation and maintenance of port infrastructure. Vital processes in transport include ensuring continuity of supplies, handling of product dispatch, transport organisation and services, and operation of ports owned by the Company. There are two port facilities (a sea port and a barge port), which have bulk cargo transshipment wharves and transshipment stations to handle ammonia and sulfuric acid. The product dispatch process involves efficient fertilizer storage, packaging and distribution. The logistics system handles over 3m tonnes of bulk cargo annually (ca. 1.5m tonnes of feedstock and raw materials and ca. 1.5m tonnes of products).

Grupa Azoty Zakłady Chemiczne Police S.A. Page 12 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Infrastructure Centre The Infrastructure Centre is responsible for managing technical infrastructure, production and distribution of cooling and demineralised water, wastewater treatment, and waste landfilling. It is a support centre established for comprehensive management of land, buildings and structures. The Centre carries out inspections of production assets to the extent required by applicable laws and standards. The Centre’s operations are environmentally friendly, as evidenced by the presence of rare species of fauna and flora in the areas adjacent to the wastewater treatment plant and the phosphogypsum landfill. Laboratory Analysis Centre The Laboratory Analysis Centre satisfies all needs of internal customers regarding chemical analyses of feedstock and raw material supplies, implementation of technological processes, quality assessment of finished goods and semi-finished products, environmental protection, OHS, and implementation of new technical and technological solutions. The Centre also provides similar laboratory services to the Company’s external customers. It operates in accordance with the Integrated Management System in place, based on the following norms: PN-EN ISO 9001 and PN-EN ISO 14001, PN-EN ISO 18001 and PN-EN ISO/IEC 17025:2018. 3.2. Overview of key products The Parent’s principal business is the manufacture of fertilizers and nitrogen compounds (PKD 20.15.Z) and the manufacture of dyes and pigments (PKD 20.12.Z). Its non-core activities comprise the manufacture of other inorganic basic chemicals (PKD 20.13.Z). Under its Company’s Articles of Association, the Company may also conduct other activities necessary to ensure proper operation of its business, including procurement of raw materials/feedstock, as well as distribution and sale of its products. The Company’s main commercial products are as follows: • compound fertilizers – NP1 (DAP, MAP) and NPK2 mineral fertilizers manufactured using mono- and bi-ammonium phosphate and salt, with secondary additives (sulfur, magnesium) and microelements, • NS fertilizer – nitrogen-based fertilizer with sulfur and magnesium, a granulated mixture of ammonia sulfate, urea and magnesite, • nitrogen fertilizer – urea, • liquid ammonia, • 32.5% urea solution for automotive applications – NOXy® (AdBlue®), • 35–45% urea solution for flue gas treatment in large power units – PULNOx®, • titanium white – a group of titanium dioxide-based white pigments. The Parent produces high volumes of sulfuric and phosphoric acid to obtain semi-finished products for the manufacture of its key commercial products. Using its semi-finished products and by-products as inputs, the Company also manufactures: • fluorosilicic acid, • dried iron (II) sulfate. 2019 production Table 14. Parent’s production volumes by product [tonnes] 2018 2019 production Product production % change volume volume Compound fertilizers 1,063,503 1,047,292 1.55% Urea 289,877 387,931 -25.28% Ammonia 297,944 412,961 -27.85% Titanium white 33,337 34,833 -4.29% NOXy® (AdBlue®) 158,860 179,230 -11.37% Sulfuric acid 678,950 689,350 -1.51% Phosphoric acid 356,750 326,418 9.29%

1 NP fertilizers – compound fertilizers with two primary : nitrogen (N) and (P). 2 NP fertilizers – compound fertilizers with three primary nutrients: nitrogen (N), phosphorus (P) and potassium (K).

Grupa Azoty Zakłady Chemiczne Police S.A. Page 13 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

2019 sales Table 15. Consolidated revenue by product Revenue Revenue Product % change 2019 2018 Compound fertilizers 1,531,415 1,385,118 10.56% Urea 272,055 337,689 -19.44% Internally produced ammonia 77,544 112,774 -31.24% Titanium white 327,038 371,983 -12.08% Other 224,266 213,784 4.90% Total revenue 2,432,318 2,421,347 0.45%

In 2019, revenue from sale of compound fertilizers and urea reached PLN 1,803,470 thousand, accounting for 74% of total revenue.

Figure 3. Revenue by main product groups and other sales 3% 6% 3% Compound fertilizers 11% Titanium white Urea Ammonia 63% NOXy® (AdBlue®) 14% Other

Revenue from sale of compound fertilizers in 2019 was PLN 1,531,415 thousand, having increased by 10.56% year on year on the back of higher sales volumes of NPK and NP fertilizers and higher selling prices of compound fertilizers. Revenue from sale of urea and internally produced ammonia amounted to PLN 272,055 thousand and PLN 77,544 thousand, respectively. The year-on-year decline in sales of these products was mainly attributable to a defect at the synthesis gas unit, which caused a temporary stoppage of ammonia and urea production lines. Revenue from sale of titanium white fell compared with 2018, mainly due to lower product prices.

3.3. Sales markets and supply sources In the reporting period, the Group’s revenue in Poland (by country of destination) was PLN 1,616,691 thousand, representing 66.5% of the total revenue. The share of sales in the Polish market in total sales did not change materially year on year. Domestic and export sales respectively accounted for 71% and 29% of total fertilizer sales. The key export markets were Germany, the United Kingdom, Denmark, Ukraine, Hungary, the Czech Republic, Lithuania, Spain and Italy. Combined sales to those countries accounted for 81% of total export sales. Sales of titanium white on the domestic market accounted for 39% of total sales of the product, with exports making up the remaining 61%. The key export markets were Germany, Italy, France, Denmark, Sweden, Belgium, Finland and Ivory Coast. Combined sales to those countries accounted for 94% of total export sales. In the case of chemicals, 55% were placed on the domestic market and 45% were exported. The key export markets were Germany, the Czech Republic, Denmark, France and the Netherlands. Combined sales to those countries accounted for 92% of total export sales.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 14 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 4. The Group’s sales by geographies (by revenue)* 100,0%

90,0%

European Union 80,0% Pozostałe 29.7% 70,0% Rest of Ameryka Europe 60,0% Południowa 2.3% 50,0% Pozostała Europa:

Africa 40,0% Unia 0.3% Europejska South 30,0% America Polska 20,0%

1.1% Poland 10,0% 66.5% 0,0% 2019 2018

* EU member states, excluding Poland

No customer/trading partner of the Company accounted for more than 10% of the Parent’s revenue in 2019. In the case of suppliers, only PGNiG S.A., a gas supplier, exceeded the 10% threshold, reaching approximately 11%. Sources of strategic raw materials 2019 saw a year-on-year increase in prices of most key raw materials for fertilizer and titanium white production: phosphate rock, , sulfur, sulfuric acid, titanium slag and fine . The average price of gas paid by the Parent was significantly lower than in 2018. Phosphate rock Phosphate rock is a raw material used for the production of phosphoric acid, which in turn is an intermediate for phosphate fertilizers, including two-nutrient NP and multi-nutrient NPK fertilizers. The world’s largest phosphorite producer is China, which practically uses up all the volumes extracted domestically without exporting the material. The largest exporter of phosphate rock is Morocco. Phosphate rock is purchased by Grupa Azoty Police under term contracts or on the spot market, largely from Africa, mainly the continent’s northern region. Potassium chloride Key suppliers of potassium chloride (KCl) include its producers based in Eastern European countries (Russia, Belarus) and Germany, having abundant resources of the mineral and offering competitive commercial terms. The procurement strategy relies mainly on framework agreements, with supplementary volumes sourced from Canada as and when needed. Potassium chloride is procured on a centralised basis at the Grupa Azoty Group level, with purchases made jointly for Grupa Azoty Police S.A. and GZNF Fosfory Sp. z o.o. Sulfur The sulfur procurement strategy is based on optimised intragroup supplies (from Grupa Azoty SIARKOPOL) with parallel supplies of sulfur and sulfur from the gas sector. This approach offers considerable flexibility of supplies, while significantly reducing the risk of supply shortages. A centralised sulfur procurement strategy (joint purchases for the entire Grupa Azoty Group enabling aggregation of supply volumes) brings down the cost to purchase this raw material. Ilmenite and titanium slag Ilmenite and titanium slag are key feedstocks for the production of titanium white. In its production processes, the Company uses mainly Norwegian ilmenite and titanium slag originating from Canada. Natural gas Natural gas was supplied by PGNiG S.A. under long-term contracts. Among its other applications, natural gas is the primary feedstock used to produce ammonia.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 15 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

3.4. Seasonality of operations Seasonality of the Group’s operations is seen mainly on the mineral fertilizers markets. Mineral fertilisers The first half of a year is a period of increased field activity in the agricultural sector, preceded by a spike in demand for agricultural inputs (including mineral fertilizers). The Group follows a policy of mitigating seasonality through optimum volume allocation:  as part of all-year supplies to the distribution network, and  by partially placing products on geographical markets with different seasonality patterns. Titanium white market Because of its core application as a component of paints and varnishes, titanium white is a seasonal product used in construction. The demand for titanium white depends on its application markets, mainly the construction sector. It usually starts to rise at the end of the first quarter and falls as the construction season ends in autumn. Due to its small scale, seasonality of other products has no major impact on the Group’s performance.

3.5. Significant agreements On January 24th 2019, the Company’s Management Board signed a potassium chloride purchase contract with JSC Belarusian Potash Company of Minsk, Belarus. The contract was concluded for a definite term from January 1st 2019 to June 30th 2019. The value of the deliveries to be made under the contract is estimated at approximately PLN 130,000 thousand.3 On February 5th 2019, the Company entered into a trilateral contract with Ameropa AG of Binningen, Switzerland and Somiva SA of Dakar-Yoff, Senegal for purchase of low-cadmium phosphate rock sourced from Senegal. The contract was concluded for a definite term from February 1st 2019 to February 28th 2021. The value of the deliveries to be made under the contract is estimated at approximately PLN 240,000 thousand.4 On May 23rd 2019, the Company’s Management Board made a representation confirming extension of the bilateral contracts of June 21st 2017 (“Individual Contracts”) to the framework agreement for gas fuel supply of April 13th 2016 with Polskie Górnictwo Naftowe i Gazownictwo S.A. As a result, the terms of the Individual Contracts were extended until September 30th 2022. The total value of the deliveries to be made under the Individual Contracts over the four-year term is estimated at approximately PLN 2,120,000 thousand.5 On December 5th 2019, the Company and the State Treasury, represented by the Prime Minister, signed an investment agreement in connection with the issue of new Series C shares offered by the Company in a public offering with the existing shareholders’ pre-emptive rights retained. Under the investment agreement, the State Treasury acquired 5,513,722 new Series C shares issued by the Company for a total amount of PLN 56,240 thousand.6 Significant agreements made after the end of the reporting period On January 9th 2020, the Company’s Management Board entered into an ilmenite supply agreement with Titania AS of Hauge i Dalane, Norway. The contract was concluded for a definite term from January 1st 2020 to December 31st 2022.

3 For details, see Current Report No. 2/2019 of January 24th 2019 – Execution of contract with JSC Belarusian Potash Company. 4 For details, see Current Report No. 3/2019 of February 5th 2019 – Execution of contract for purchase of phosphate rock. 5 For details, see Current Report No. 28/2019 of May 23rd 2019 – Extension of Individual Contracts with Polskie Górnictwo Naftowe i Gazownictwo S.A. 6 For details, see Current Report No. 68/2019 of December 5th 2019 – “Execution of investment agreement with State Treasury”.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 16 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

The value of the deliveries to be made under the contract is estimated at approximately PLN 168,000 thousand.7

3.6. Significant events Issue of shares On April 26th 2019, the Company’s Extraordinary General Meeting passed a resolution on an increase in the Company’s share capital through a rights issue and on amendments to the Company’s Articles of Association. On June 5th 2019, the Company’s Management Board resolved to suspend implementation of the Extraordinary General Meeting’s resolution of April 26th 2019 to increase the Company’s share capital through a rights issue and amend the Company’s Articles of Association. The Management Board determined that suspending the offering until the situation clears up with regard to the ongoing regulatory changes would be in the best interests of potential investors and the Company itself8. On August 26th 2019, the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. decided to resume a secondary public offering of Company shares and passed a resolution on a proposed share capital increase by way of a rights issue and on amendments to the Company’s Articles of Association9. Proceeds from the share issue will be used to support the implementation of the Grupa Azoty Group’s strategy for the coming years, in particular to diversify revenue streams and increase profitability, and to step up the efforts to expand non-fertilizer business lines. The key task in this respect is the execution of the Polimery Police project. On November 4th 2019, acting under an authorisation granted by the Extraordinary General Meeting, the Company’s Management Board set the issue price at PLN 10.20 per New Share and determined the number of pre-emptive rights entitling a holder to subscribe for one New Share. At the same time, the Company’s Management Board decided not to exercise its powers arising from Art. 432.4 of the Commercial Companies Code and the EGM Resolution to determine the final amount by which the share capital of the Company was to be increased. Therefore, the final number of New Shares equals the maximum number of New Shares set forth in the EGM Resolution, i.e. 110 million New Shares10. On November 5th 2019, the Polish Financial Supervision Authority approved the Company’s prospectus11. On the same date, the Central Securities Depository of Poland (the “CSDP”) issued a statement to the effect that it had executed an agreement with the Company for registration in the depository maintained by the CSDP of 75 million pre-emptive rights to the Company’s Series C ordinary bearer shares with a par value of PLN 10.00 per share12. On November 7th 2019, the Management Board of the Warsaw Stock Exchange (the “WSE”) passed a resolution to admit and introduce to trading on the WSE Main Market pre-emptive rights to Company Series C ordinary bearer shares on the terms and conditions communicated to the public in detail in the Company’s Current Report No. 63/2019. 49,175,768 Series C ordinary bearer shares were acquired in a secondary offering of the Company shares at an issue price of PLN 10.20 per share. The Parent raised proceeds of PLN 501,592,833.60. They will be allocated to the implementation by the Company’s subsidiary, Grupa Azoty Polyolefins S.A., of an investment project to construct propylene and polypropylene production units and ancillary infrastructure (the “Polimery Police Project”). On January 10th 2020, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered an increase of the Company’s share capital from PLN 750,000,000 to PLN 1,241,757,680 by way of an issue of 49,175,768 Series C ordinary bearer shares in

7 For details, see Current Report No. 3/2020 of January 9th 2020 – “Execution of contract with Titania AS”. 8 For details, see Current Report No. 32/2019 of June 5th 2018 – Suspended implementation of resolution of Extraordinary General Meeting. 9 For details, see Current Report No. 43/2019 of August 26th 2019 – Proposed share capital increase at Grupa Azoty Zakłady Chemiczne Police and resumption of secondary public offering of Company shares. 10 For details, see Current Report No. 58/2019 of November 4th 2019 – Setting the final number of New Shares, their issue price and the number of pre-emptive rights entitling the holder to subscribe for one New Share. 11 For details, see Current Report No. 59/2019 of November 5th 2019 – Company’s prospectus approved by Polish Financial Supervision Authority. 12 For details, see Current Report No. 60/2019 of November 5th 2019 – Pre-emptive rights to Company Series C ordinary shares registered with CSDP.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 17 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) the Company, with a par value of PLN 10.00 per share, and amendments to the Company’s Articles of Association resulting from resolutions of the Extraordinary General Meeting of the Company of November 7th 2019 and September 23rd 2019, as well as a statement by the Company’s Management Board of December 24th 2019. Following the share issue, as of January 13th 2020 the Company’s share capital consists of 124,175,768 shares with a par value of PLN 10 per share, comprising: • Series A shares numbered from 000 000 001 to 060 000 000; • Series B shares numbered from 060 000 001 to 075 000 000; • Series C shares numbered from 075 000 001 to 124 175 768.13 As at the date of this Report, the Parent was not aware of any agreements between shareholders or any agreements that may lead to future changes in the percentages of shares held by the existing shareholders. The Company does not operate any control system for employee share option plans. Dividends On March 28th 2019, the Annual General Meeting of KEMIPOL Sp. z o.o. resolved to distribute dividend from profit generated in 2018, including PLN 12,314 thousand to the Company. The dividend was paid on July 31st 2019.

4. Growth policy and strategy 4.1. Growth strategy and directions The Grupa Azoty Group’s mission is to supply safe and useful chemical products suitable for the changing needs of the chemical and agricultural industries worldwide. The Company is implementing modern and comprehensive solutions in the chemical industry, seeking to enhance product quality while maintaining compliance with growing environmental and health safety requirements. Through implementation of the Polimery Police Project and launch of the polymer production business, the Group participates in the development of the chemical sector and related industries in Poland. With its research, development and innovation efforts, the Company will position itself in high-margin, specialty chemicals markets. Together with the other Group companies, the Company is implementing its updated growth strategy until 2020 (and is working on the strategy for the following period), aiming to strengthen its position as the Polish leader in the supply of state-of-the-art and innovative product solutions in the chemical sector to the market. In order to diversify its revenue sources and become less dependent on business cycles in agriculture, the Company is increasing its efforts to expand the non-fertilizer business lines by implementing the Polimery Police Project. The new business segment will consists of production and supply of polymers to customers in the expanding market in Poland and Europe, which is expected to drive a significant revenue growth for the Company in the long term. The Group’s strategic objective remains to consolidate its strong position on the domestic and regional fertilizer markets by adjusting its product mix to the changing needs of modern agriculture. Relying on its own unique capabilities in agricultural products, the Company is developing its product portfolio based on innovative technological solutions aimed at improving product quality and safety. The Company is taking measures to increase the efficiency of its production processes. The most important initiatives will continue to include optimisation of operating costs and resources, in particular by improving energy and process efficiency, introducing new solutions and technologies to bring down costs and increasing capacity utilisation, while ensuring compliance with environmental and technical safety requirements. The Group’s operations comprise the fertilizers segment, pigments segment and the new polymers segment. The fertilizers business, comprising production of compound fertilizers, phosphoric and sulphuric acid and nitrogen fertilizers as well as ammonia and other nitrogen intermediates and finished products, is the Company’s core production segment.

13 For details, see Current Report No. 05/2020 of January 13th 2020 – “Registration of share capital increase and amendments to the Articles of Association”.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 18 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

In 2019, the Company was engaged in the following initiatives to support organic growth of the fertilizers segment. The main projects carried out by the Parent include: change of the phosphoric acid production technology to improve production efficiency and product quality; fabrication and installation of new heat exchangers to improve the technical condition and enable the use of more efficient equipment, thus enhancing the operational stability of the ammonia unit; replacement of the absorption tower to maintain uninterrupted operation of the sulfuric acid unit, and construction of units for the production, storage and loading of technical grade PULNOx urea solutions. Some of the major completed investment projects are: extension of the heat exchange unit of the CCW closed- loop cooling system serving the ammonia and urea units; computerisation of the I&C unit and electrical systems of the NPF Department of the PF-4 crude acid unit (phosphoric acid); upgrade of the absorption system at the urea plant; upgrade of the absorption system at the fertilizer plant; and replacement of a low-temperature conversion catalyst. 2019 saw the commencement of another fertilizer dryer replacement project involving adaptation of the rail tank car unloading stands at the sulfuric acid storage facilities to applicable legal requirements, and replacement of large-fraction sieves in the fertilizer unit. In the pigments segment, which makes titanium white and related intermediate products (iron sulfate and hydrolytic acid), initiatives were undertaken in 2019 to remove bottlenecks, improve production efficiency and enter new application segments. These included: • commencement of the process to replace the calciner feed filter; • replacement of the iron sulfate centrifugal machine on the waste acid concentration unit; • installation of an additional sieve to improve the efficiency of the FESPOL unit. As the Polimery Police project is still under way, the polymers segment has not yet commenced its proper operations. It generates immaterial revenue, while incurring day-to-day running costs. In this segment, the Company plans to manufacture polypropylene, one of the most popular polymers, with the largest growth rate, primarily due to its diverse properties. In connection with the Polimery Police Project, the largest undertaking in the Polish chemical sector, the Company took steps to ensure synergies between new and existing production units, and to adapt some of the units owned by the Company to new technical requirements. In 2019, the Company started a project to decouple its demineralised water production from variable salinity of the Oder river and to increase the capacity of water preparation units to produce process waters. A project is also under way to adapt energy infrastructure to the needs of the PP and PDH units (construction of a new main power supply point, upgrade of the 220/110 kV GPZ Police power station), as are certain logistics projects related to the Polimery Police Project (upgrade of tracks 208, 340, 341 and related infrastructure). The improved efficiency of the Group’s operations is also achieved through the ongoing consolidation of the Grupa Azoty Group companies. The Company has been engaged in efforts to deepen the consolidation of its fertilizer trading processes and in the process of integrating the companies’ production environment in the area of design, project execution, plant maintenance, laboratory services, and small-scale chemical production. The Company has been actively involved in the integration of the Grupa Azoty Group with COMPO EXPERT in the areas of possible synergies: production know-how, trade, research and development, raw materials and products, and financing.

4.2. Growth prospects and market strategy The Group pursues its growth strategy by leveraging new business opportunities and strengthening capabilities of key relevance to its competitive position. In order to diversify revenues and reduce reliance on business cycles in agriculture, the Group plans to expand its product portfolio through the implementation of the Polimery Police Project. The launch of a new non-fertilizer business of polymer production is to drive revenue growth for the Company in the long term. The goal is to achieve, once the project is operational, the maximum target capacity of the polypropylene plant of ca. 437,000 tonnes a year. Given the technical and process links with the Polimery Police Project, further capital expenditure will need to be incurred to adapt some of the units operated by the Company. Some of the major capex projects in the pipeline include the project to use hydrogen from Grupa Azoty Polyolefins in the ammonia unit and to upgrade the 110/6kV power substation (ob. W-121) and build two 6kV connections supplying power to the propane and ethylene handling and storage terminal with auxiliary infrastructure. A project to mitigate the noise impact of the existing and future process units of the Parent and Grupa Azoty Polyolefins S.A. is in the planning phase.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 19 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

The Parent’s strategic objectives remains to strengthen its market position among the leading providers of solutions for agriculture on the European market. Given the changing expectations of key customers, the Company will adjust its range of fertilizer products to customer needs by expanding its portfolio of specialty products dedicated to specific crops and customers and by offering farmers additional agri-tech consultancy services. The Group also plans to adjust its fertilizer product portfolio to the expectations of large farms, while maintaining a strong position among small farmers. Those objectives are pursued through initiatives designed to develop new products in the compound fertilizers segment. The Company is continuing to expand its mix to include liquid fertilizers. The Group plans to effectively leverage its own unique capabilities in agricultural products to develop its fertilizer product portfolio based on innovative technologies aimed at improving product quality and safety. The Group is currently pursuing the strategic objective related to the development of its fertilizer product base by implementing, among others, a research and development project (in cooperation with Grupa Azoty Zakłady Azotowe Puławy S.A.) to develop a new technology for optimum and efficient purification and concentration of phosphoric acid (V) to produce ammonium polyphosphate from sedimentary phosphate bearing materials and obtain product innovations in the form of a new type of universal liquid fertilizers based on ammonium polyphosphate solutions. As regards expanding its offering with specialised services for agriculture, the Company will develop its ongoing initiatives, such as the ‘Grounded in Knowledge’ programme and the SatAgro satellite field monitoring programme, and will also implement new projects in specialised services. The Group will continue to pursue initiatives aimed at improving the efficiency of its manufacturing and distribution operations. The most important value growth initiatives will continue to include optimisation of operating costs and resources, in particular by improving energy and process efficiency, introducing new solutions and technologies to bring down costs and increasing capacity utilisation, while ensuring compliance with environmental and technical safety requirements. Operating costs will be reduced as a result of further upgrades of production lines with the aim, among others, to ensure the continuity of their operation. As part of its efficiency improvement measures, the Group will continue to upgrade its fertilizer units, including sulfuric acid and phosphoric acid units, ammonia and urea units, as well as titanium white units. Another efficiency-boosting project is the upgrade of the phosphoric acid unit. Once completed, it will bring tangible benefits for the Company by enhancing production efficiency through improved P2O5 recovery, reducing process steam consumption in the acid concentration process, lowering the amount of waste phosphogypsum, and improving the acid’s quality by bringing down the cadmium content in the acid. Efficiency will also be supported following the completion of the ongoing project to build facilities for storage and loading of technical-grade urea solutions. In addition, the Group will strive to reduce the consumption of strategic feedstocks and process utilities as well as streamline inventory management. In order to increase efficiency in product distribution, the Group will take steps to increase control over domestic and foreign fertilizer sales channels. With respect to the pigments segment, the strategy’s objective is to secure stable product sales during economic down cycles. The Company will entrench its leading position on the Polish market and retain key customers on target markets across Europe. The Group’s strategy for the pigments segment is to maintain a broad product portfolio and continue the initiatives aimed at improving efficiency of existing units by implementing upgrades and removing bottlenecks, and extending the value chain to include polymer additives.

4.3. Main capex projects in Poland and abroad In 2019, the Group’s capital expenditure on property, plant and equipment and intangible assets reached PLN 198,715 thousand, including: • maintenance capex of PLN 21,978 thousand; • mandatory capex of PLN 12,859 thousand; • growth capex of PLN 92,755 thousand; • purchase of finished goods of PLN 24,255 thousand; • major overhaul work and other expenditure of PLN 46,868 thousand.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 20 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 5. Structure of capital expenditure by type 11% 24% Maintenance capex 6% Mandatory capex

Growth capex

12% Purchase of finished goods 47% Major overhauls, other.

The Parent’s expenditure on property, plant and equipment and intangible assets was PLN 107,859 thousand. Capital expenditure of the subsidiary Grupa Azoty Polyolefins S.A. on property, plant and equipment and intangible assets was PLN 83,275 thousand.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 21 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

THE GROUP’S KEY INVESTMENT PROJECT In 2019, work was under way on Polimery Police, the Group’s key investment project Involving the construction of propylene and polypropylene units with auxiliary facilities and infrastructure, as well as a port terminal with feedstock storage facilities. Polimery Police broke ground as scheduled, in late 2019 and early 2020. Its completion is expected in late 2022. Technical workstream Signing a contract for the implementation of the Polimery Police project On May 11th 2019, the subsidiary Grupa Azoty Polyolefins S.A. (“GA Polyolefins”) and Hyundai Engineering Co., Ltd. (“Hyundai”) signed a contract for turnkey execution of the Polimery Police project. Hyundai’s consideration was set at a lump sum of EUR 992,811 thousand, VAT exclusive (basic scope). The lump sum consideration is subject to change in exceptional cases only, as specified in the contract, as part of a change procedure.14 The EPC contract also includes a provision entitling GA Polyolefins to engage, following a review, the general contractor or another entity to carry out six additional options, namely: • Construction of a water treatment unit • Construction of the nitrogen plant for the PDH Unit and the PP Unit • Planning and performing dredging work to increase depth from 10.5 to 12.5 metres • Providing laboratory equipment for the Polimery Police project • Providing equipment for production and plant maintenance services • Extension of the warranty for anti-corrosion and fire protection coatings from 24 to 36 months. On August 1st 2019, Hyundai started to perform its obligations. On the same day, GA Polyolefins paid an advance on the execution of the projects in the amount of EUR 10,000 thousand (VAT exclusive). On August 29th 2019, an Extraordinary General Meeting (“EGM”) of GA Polyolefins passed a resolution approving the engagement of Hyundai Engineering Co. Ltd. to perform one of the options under the Polimery Police project, that is to construct the nitrogen plant for the PDH Unit and PP Unit. On November 8th 2019, the GA Polyolefins EGM passed a resolution approving the engagement of Hyundai Engineering Co. Ltd. to carry out the following options under the Polimery Police project: • Providing laboratory equipment for the Polimery Police project • Providing equipment for production and plant maintenance services • Extension of the warranty for anti-corrosion and fire protection coatings from 24 to 36 months. Also on November 8th 2019, the GA Polyolefins EGM passed a resolution approving the conclusion by GA Polyolefins of a contract with Przedsiębiorstwo Robót Czerpalnych i Podwodnych sp. z o.o. for the execution of the project “Planning and performing dredging work to increase depth from 10.5 to 12.5 metres as part of the Polimery Police project”. The Water Treatment Unit option was excluded from the EPC contract. On December 23rd 2019, the GA Polyolefins EGM passed a resolution approving the issue to the contractor implementing the Polimery Police project the full notice to proceed regarding the EPC contract. GA Polyolefins issued the notice on the same day. After Hyundai began work on the project, GA Polyolefins made an advance payment of 10% of the lump sum consideration to Hyundai, taking into account the advance payment made on August 1st 201915. Financing workstream Financing of the project by Hyundai and KIND Following the execution of an investment cooperation agreement on May 10th 2019, on December 23rd 2019 Grupa Azoty S.A., the Company, Grupa Azoty Polyolefins S.A. signed a term sheet concerning equity financing of the Polimery Police project with Hyundai Engineering Co., Ltd (“HEC”) and Korean Overseas Infrastructure & Urban Development Corporation (“KIND”). After the execution of the initial term sheet regarding equity investment and financing of the Polimery Police project

14 For details, see Current Report No. 26/2019 of May 11th 2019 – Turnkey execution of the Polimery Police project. 15 The above events were announced by the Company in Current Report No. 76/2019 of December 23rd 2019 - “Issuance of Full Notice to Proceed under EPC Contract”.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 22 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) with , the parties modified the transaction documents so as to ensure consistency between the rights of KIND and Hyundai and the rights agreed upon with Grupa LOTOS16. Under the term sheet, Hyundai agreed to invest a total of USD 73,000 thousand by providing a cash contribution to subscribe for the increased share capital of GA Polyolefins and taking up new shares in GA Polyolefins. KIND committed to invest in the Project a total amount of USD 57,000 thousand, through: • a cash contribution of USD 5,000 thousand to subscribe for the increased share capital of GA Polyolefins and take up new shares in GA Polyolefins; and • granting GA Polyolefins a subordinated loan of USD 52,000 thousand. The Original Sponsors (the Company and Grupa Azoty S.A.) agreed to invest in the Project a total amount of up to PLN 1,400,000 thousand and proceeds raised from the secondary public offering of Company shares (depending on the outcome of the offering) by making cash contributions to subscribe for shares in the increased share capital of GA Polyolefins and taking up new shares in GA Polyolefins or by granting GA Polyolefins subordinated loans on commercial terms. The Joint Sponsors’ investment is conditional upon fulfilment of the conditions precedent stipulated in the term sheet, including: (i) the Original Sponsors contributing the total amount of their investment in accordance with paragraph (b) above; (ii) Grupa Azoty Polyolefins issuing a Full Notice to Proceed under the EPC contract signed on May 11th 2019 by Grupa Azoty Polyolefins and Hyundai; (iii) determining the final shareholding structure of Grupa Azoty Polyolefins; (iv) signing a credit facility agreement as a source of debt financing for the Project; and (v) satisfaction of certain conditions precedent stipulated under debt financing documentation, as specified in the term sheet. (vi) obtaining the relevant antitrust clearance from the competent competition authority, (vii) fulfilling other conditions precedent to be specified in the final equity financing documents. The parties agreed, among other things, that the Joint Sponsors will be entitled to jointly appoint one new member of the Supervisory Board of Grupa Azoty Polyolefins as long as they hold together at least 5% of Grupa Azoty Polyolefins shares. The parties further agreed that the final equity financing documents will provide for a lock-up period starting from the date when the Joint Sponsors transfer their investment to Grupa Azoty Polyolefins and ending on the third anniversary of the Project completion date. The parties also agreed on a divestment procedure for the Joint Sponsors applicable in specified circumstances. The term sheet provides that the Original Sponsors may carry out a public offering after the expiry of the lock-up period (i.e. the period for which the Joint Sponsors agreed not to sell shares in GA Polyolefins). In addition, the Parties preliminarily agreed on a put option for the Joint Sponsors and a call option for the Original Sponsors, in each case with respect to the Grupa Azoty Polyolefins shares held by the Joint Sponsors, with a total value (calculated on the basis of the price originally paid by the Joint Sponsors for those shares) of up to USD 70,000 thousand, and in the case of the put option – additionally reduced by any dividends paid to the Joint Sponsors. In addition, the Parties provided for an exit mechanism for Hyundai and KIND in respect of the balance of the Joint Sponsors’ equity contribution, which is to consist in re-acquisition of the shares by GA Polyolefins for cancellation. The Parties agreed that the options would expire on or before December 31st 2025. The parties agreed that the final equity financing documents will provide for contractual penalties should the Joint Sponsors breach their obligations related to the divestment process. The Term Sheet constitutes a binding obligation of the Parties provided that: • the wording of the equity financing documents i.e. the investment agreement, shareholders’ agreement, and any other documents required in connection with equity financing of GA Polyolefins, is agreed upon to the satisfaction of the Joint Sponsors, • the wording of the KIND loan agreement is agreed upon to the satisfaction of KIND, and • the conditions precedent set out in the Term Sheet are satisfied17.

16 The Company announced the above events in Current Report No.49/2019 “Execution of an agreement on the terms of equity financing for the Polimery Police project with Hyundai Engineering Co., Ltd and Korean Overseas Infrastructure & Urban Development Corporation”, dated September 19th 2019. 17 The Company announced the above events in Current Report No.77/2019 “Execution of amended term sheet concerning equity investment and financing of Polimery Police project with Hyundai Engineering Co., Ltd and Korea Overseas Infrastructure & Urban Development Corporation”, dated December 23rd 2019.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 23 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Terms sheet with Grupa LOTOS Further to the letter of intent signed on April 26th 2019, on December 13th 2019 an initial term sheet concerning the terms of equity investment and financing of the Polimery Police project was signed between the Company, Grupa Azoty S.A., Grupa Azoty Polyolefins S.A., and Grupa LOTOS S.A. The execution of the initial term sheet was preceded by the execution of three annexes extending the validity of the Letter of Intent of April 26th 2019. The annexes were made on: • October 31st 2019 • November 22nd 2019 • December 6th 2019 Under the Agreement: Grupa LOTOS S.A. agreed to invest a total of PLN 500,000 thousand in the Project by: • making a cash contribution of up to PLN 300,000 thousand to subscribe for shares in the increased share capital of GA Polyolefins (the “Joint Sponsor’s Equity Investment”) and • granting Grupa Azoty Polyolefins S.A. a subordinated loan of up to PLN 200,000 thousand (the “Joint Sponsor’s Loan”) (jointly: the “Joint Sponsor’s Investment”). The Original Sponsors (the Company, Grupa Azoty S.A.) confirmed the undertaking set forth in the Terms Sheet signed with Hyundai and KIND to invest in the Project a total amount of up to PLN 1,400,000 thousand, including the funds already transferred, and, in addition, proceeds from a Secondary Public Offering (SPO) of Company shares, consisting of funds raised from the subscription for new shares in Grupa Azoty Zakłady Chemiczne Police S.A. by investors other than Grupa Azoty S.A. through: cash contributions made to subscribe for shares in the increased share capital of GA Polyolefins, or subordinated loans granted to GA Polyolefins on commercial terms (jointly the “Original Sponsors’ Investment”). • • Grupa LOTOS’ investment is subject to a number of conditions precedent set forth in the Term Sheet, including:

• obtaining approval of the Joint Sponsor’s Investment in the form of a resolution of Grupa LOTOS’ Supervisory Board; • obtaining approval of the acquisition of/subscription for GA Polyolefins shares in the form of a resolution of Grupa LOTOS’ General Meeting; and • obtaining the relevant antitrust clearance from the competent competition authority, if required. The Parties agreed, among other things, that Grupa LOTOS, as a shareholder in GA Polyolefins, would have personal rights comprising: • the right to appoint one member of the GA Polyolefins Supervisory Board, and • the right to convene the GA Polyolefins General Meeting. • The Parties further agreed that the final equity financing documents would provide for a lock-up period. The Parties also agreed on the procedure for the sale of GA Polyolefins shares by Grupa LOTOS after the lock-up period expired. The Term Sheet constitutes a binding obligation of the Parties, subject to: • fulfilment of the conditions precedent set out in the Term Sheet, and • agreement on and execution of equity financing documents, i.e. the investment agreement, shareholders’ agreement, and any other documents required in connection with equity financing of GA Polyolefins. The Term Sheet was signed for a definite term, until December 31st 2020, with the option of its extension or early termination if the Parties so agree or if it is unilaterally terminated by Grupa LOTOS as a result of a material adverse change which affects, directly or indirectly, the Project, GA Polyolefins or the Original Sponsors and, in any event, prevents implementation of the Project on the terms presented to the Joint Sponsor by the date of execution of the Term Sheet18. Signing of commitment letters

18 For details, see Current Report No.71/2019 “Execution of initial term sheet with Grupa LOTOS for equity investment and financing of Polimery Police” of December 13th 2019.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 24 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Before the date of this Report, the Management Board of Grupa Azoty Polyolefins and financial institutions had signed commitment letters confirming the submission by those institutions of offers approved by their credit committees. The financing institutions involved in the Project include: PKO BP S.A., S.A., Bank Gospodarstwa Krajowego, S.A., PZU S.A., Bank Ochrony Środowiska S.A., S.A., BNP Paribas Bank Polska S.A., European Bank for Reconstruction and Development, mBank S.A. as well as Industrial and Commercial Bank of China (Europe) S.A. Poland Branch. According to information received from GA Polyolefins, the total amount offered by the financial institutions is sufficient to fully satisfy the subsidiary’s requirement for senior debt financing. Decisions and permits On January 31st 2019, the Regional Director for Environmental Protection issued an environmental permit for an updated scope of the project, i.e. for the PDH and PP units together with auxiliary infrastructure. The environmental permit, preceded by public consultations, became final in early March 2019. On December 20th 2019, Hyundai Engineering, the general contractor for the Polimery Police project, received the first building permit (work in the area of the storage and handling terminal). On January 17th 2020, the Polish Office of Competition and Consumer Protection (UOKiK) issued a decision clearing the proposed concentration whereby Grupa Azoty, Hyundai Engineering, Korea Overseas Infrastructure & Urban Development Corporation and Grupa Lotos would establish a joint venture operating under the name of Grupa Azoty Polyolefins. The application for the decision was filed on December 23rd 2019. On January 29th 2020, the Management Board of GA Polyolefins and Przedsiębiorstwo Robót Czerpalnych i Podwodnych sp. z o.o. concluded a contract for the execution of the project “Planning and performing dredging work to increase depth from 10.5 to 12.5 metres as part of the Polimery Police project” for a remuneration of PLN 15,283,752.50. On February 19th and February 20th 2020, Hyundai Engineering Co., Ltd., general contractor for the Polimery Police project, obtained another three building permits. The permits, issued by the Police County Governor, greenlight the start of construction of the propane dehydrogenation (PDH) unit.

PARENT’S KEY PROJECTS In 2019, the Company launched 26 new projects with an aggregate budget of PLN 211,813 thousand and continued 44 projects commenced in previous years. The number of projects completed by the Company in 2019 was 25, the key ones being presented and described below.

Decoupling of demineralised water production from variable salinity of the Oder river and increasing the units’ capacity to produce process waters The upgrade and expansion of the water treatment and demineralisation stations will help protect the Company against periodically increased salinity of the Oder river and enable using water from the river as the Company’s only source of supply of demineralised water. The project will also secure the supply of demineralised water to Grupa Azoty Polyolefins S.A. units. Corporate approvals for the implementation of the project were obtained in December 2019. An EPC contract was signed for the project. Development of design documentation is under way. Amount: PLN 102,000 thousand. Project budget: PLN 108,000 thousand; expenditure incurred: PLN 1,049 thousand; planned completion date: 2022. 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 is based on a licence from Prayon Technologies S.A. All the work has been completed. The dihydrate technology part of the project was placed in service in July 2019. The project will be completed once the start-up of the hemihydrate method part is performed. Project budget: PLN 83,350 thousand; expenditure incurred: PLN 82,748 thousand; planned completion date: 2020.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 25 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Upgrade of the 220/110 kV GPZ Police transformer/switching station to connect and supply power to the propane dehydrogenation and polypropylene production unit The upgrade of the GPZ Police transformer/switching station will secure the distribution of electricity for the purposes of the planned propane dehydrogenation and polypropylene production unit (Polimery Police). Corporate approvals for the implementation of this investment project were obtained in June 2019. A tender procedure for the purchase and start-up of autotransformers was concluded. The contract is currently in progress. In early October, a tender procedure for the upgrade of the transformer/switching station (GPZ) on an EPC basis was started. The procedure was closed on February 20th 2020. Project budget: PLN 42,500 thousand; expenditure incurred: PLN 21 thousand; planned completion date: 2022 WA II tower replacement on Line 7 The replacement of the absorption tower is aimed at ensuring continuing operation of the sulfuric acid production plant and preventing an unexpected failure which poses a risk of a sulfuric acid leak. An EPC contract was signed for the project. Development of design documentation is under way. Project budget: PLN 16,350 thousand; expenditure incurred: PLN 251 thousand; planned completion date: 2021 Replacement of 17/18E601A and 17/18E601B heat exchangers When implemented, the project will improve the technical condition and enable the use of more efficient equipment, thus enhancing the operational stability of the ammonia unit. The E601 heat exchangers in the ammonia synthesis unit on Lines A and B were installed, commissioned and put in operation. The project was completed. Project budget: PLN 15,500 thousand; expenditure incurred: PLN 14,582 thousand. Computerisation of the I&C and electrical systems of the NPF Department of the PF-4 crude acid unit As the industrial processes are fully automated, it will be possible to deploy an advanced production process control system. The upgrades will enable in particular precise dispensing of raw materials and utilities, continuous tracking and analysis of trends. The project was completed and placed in regular service. Project budget: PLN 10,846 thousand; expenditure incurred: PLN 10,846 thousand. Facility 508 tray with a sedimentation tank and an acidic wastewater drain The existing tray under the phosphoric and sulfuric acid tanks is in a poor technical condition. The tanks are tilting as a result of the continuing settlement of the tray and tank footing under the weight of the materials. The project was opened in early August 2019. The contractor for the project was selected. The construction site manager was appointed and the commencement of work was notified to the Building Inspection Authority. Project budget: PLN 10,810 thousand; expenditure incurred: PLN 230 thousand; planned completion date: 2021 Construction of PULNOx technical-grade urea solution production, storage and loading facility The project will guarantee the availability of PULNOx solution for the existing and future customers of the Company. Higher output of the solution will also increase the Company’s revenue. The main construction and assembly work has been completed. Pressure tests are being performed and the pipelines are being insulated. Project budget: PLN 5,900 thousand; expenditure incurred: PLN 4,470 thousand; planned completion date: 2020

Grupa Azoty Zakłady Chemiczne Police S.A. Page 26 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

4.4. Key equity investments On August 7th 2019, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered an increase in the share capital of the Company’s subsidiary Grupa Azoty Polyolefins S.A. Following the registration, Grupa Azoty Polyolefins’ share capital was increased from PLN 304,000 thousand to PLN 467,339 thousand. Currently, the total number of shares of all issues is 46,733,900 (previously: 30,400,000). The par value per share is PLN 10. As a result of the share capital increase, the number of Grupa Azoty Polyolefins shares held by the Company rose from 18,217,875 to 24,768,967 shares with a par value of PLN 10 per share and total value of PLN 247,689.67 thousand19. On February 18th 2020, the Extraordinary General Meeting of Grupa Azoty Polyolefins S.A., the Company’s subsidiary, resolved to increase the share capital of GA Polyolefins by PLN 131,994.31 thousand through the issue of 13,194,431 new Series F registered shares with a par value of PLN 10 per share. The issue price of each Series F share is PLN 47.90. The new shares will be taken up by way of a private placement by: • The Company, which will take up 6,993,048 (six million, nine hundred and ninety-three thousand, forty-eight) shares; • Grupa Azoty S.A., which will take up 6,201,383 (six million, two hundred and one thousand, three hundred and eighty-three) shares.20

4.5. Feasibility of investment plans The Company is continuing investment projects commenced in previous years, but also plans to begin new ones. The Company has full capacity to finance such investment projects. Expenditure on property, plant and equipment under the 2020 Investment Plan will be financed, first of all, with the Company’s own resources, working capital and funds available under the Grupa Azoty Group’s New Financing Agreements, intended to finance the Grupa Azoty Group’s general corporate needs arising from its Strategy and Investment Programme. The available credit facilities ensure long-term capex financing, reducing the risk of the Company failing to carry out its investment plans to a minimum. Environmental protection projects will be analysed for the potential for raising financing from non- bank sources on preferential terms, such as EU funds or national support programmes.

4.6. Significant R&D achievements In its growth-oriented efforts, the Company seeks to support the delivery of its product and market strategy and focuses on meeting customer requirements and delivering value added with each product. Therefore, in its research and development activities the Parent focuses on improving and expanding its product range and manufacturing capabilities, as well as addressing environmental aspects. The Company’s key development projects cover production processes, manufacturing technologies, application technologies, efficient use of feedstocks and products, as well as meeting the legislative requirements for the Company’s products. In 2019, the Parent commenced a research and development project “Development of a technology for the production of a new type of liquid fertilizers based on phosphate-bearing materials of sedimentary origin”. The project is implemented by a consortium comprising the Parent, as the consortium leader, and Grupa Azoty Zakłady Azotowe Puławy S.A., a key company of the Grupa Azoty Group, as a consortium member. By 2023, the consortium plans to obtain prototypes of innovative liquid fertilizers manufactured using ammonium polyphosphate, as well as other solutions and fertilizer components. The Parent cooperates with the other key companies of the Grupa Azoty Group in other projects related to the production of urea and specialty granulated nitrogen and compound fertilizers.

19 For details, see Current Report No. 40/2019 of August 8th 2019 – Court registration of share capital increase at subsidiary. 20 Based on Current Report No. 22/2020 of February 18th 2019 – “Approval of share capital increase by PDH Polska General Meeting”.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 27 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

In 2019, studies focusing on the assessment of the effectiveness of modified fertilizer formulas and their impact on the development of selected crops and soil parameters were continued and developed. Having regard to the need to protect the natural environment and ensure occupational safety, the Company is engaged in development and upgrade projects designed to mitigate nuisance caused by its principal manufacturing operations. Research work was conducted to search for new alternative sources of fertilizer components and recover valuable raw materials from production waste streams. Finding an effective method of using phosphogypsum (waste from the production of phosphoric acid (V) using the extraction method) remains the biggest research challenge. Research was continued into the possibility of phosphorus recovery from industrial wastewater and new methods of economic use of phosphogypsum, which is in line with the idea of sustainable use of phosphorus and the concept of circular economy. The aim is to develop a technology for recovering phosphorus from phosphogypsum landfill leachate, in the form of compounds that can be recycled or be suitable for direct application as a fertilizer, as well as to introduce new and economically viable uses for by-product and waste streams. 2019 saw the completion of a major R&D project with significant implementation potential, consisting in the use of innovative and environmentally-friendly paint pigments, implemented in partnership with the West Pomeranian University of Technology in Szczecin. The project was implemented as part of the TANGO programme, a joint venture of the National Centre for Research and Development and the National Science Centre. In these activities, the Parent was working closely with academic and research institutions. The Implementation Doctorates (Polish: Doktorat Wdrożeniowy) programme of the Ministry of Science and Higher Education was continued in cooperation with the West Pomeranian University of Technology, Szczecin, with the involvement of a group of Company employees. Co-financing of an R&D project The Company is implementing an R&D project: “Development of a technology for the production of a new type of liquid fertilizers based on phosphate-bearing materials of sedimentary origin”, co-funded by the EU. The purpose of the project is to develop a new technology for optimum and efficient purification and concentration of phosphoric acid (V) for the production of ammonium polyphosphate (APP) based on phosphate-bearing materials of sedimentary origin and APP-based innovative liquid fertilizers. The project will ultimately deliver product innovations in the form of modern APP-based liquid fertilizers manufactured using UAN solutions and other fertilizer components. The Company is the leader of the Consortium implementing the project. The maximum amount of EU funding is PLN 7,420, representing 49.94% of total eligible expenditure.

5. Current financial condition and assets 5.1. Assessment of factors and one-off events with a material impact on operations and financial performance Extended shutdowns of the ammonia and urea units During the scheduled annual maintenance shutdown at the Nitro Business Unit between April 4th and June 11th 2019, a defect in boilers was discovered at the synthesis gas unit. Consequently, the ammonia synthesis and urea synthesis units were not put back in service as planned. The event had no adverse environmental impact, but had an effect on the Company’s financial performance. The Company disclosed the preliminary estimates of lost profits in Current Report No. 42/2019 of August 13th 2019. The prolonged shutdown of the units caused a significant decrease in the sales volumes of nitrogen products (including urea and its solutions) and a loss of margins, which the Company believes were very likely to have been achieved if the units had operated normally. The estimated losses amount was also due to the fact that the unscheduled shutdown extension occurred in a period of relatively low gas prices and favourable conditions on the urea market, presenting an opportunity to achieve relatively high margins. In the second half of August 2019, one ammonia line and the urea unit went back on stream (the latter was originally planned to be restarted in June). The second ammonia line was launched in mid- December.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 28 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

In the whole of 2019, the potential loss of margin was estimated at PLN 63m. In connection with this occurrence, the Company made a claim under its insurance policies. The insurer appointed an independent expert to determine the cause of the damage and its liability and, according to the information received, is waiting for the expert’s report. The insurer also notified the Company that examination of the case may take longer than usual due to the state of epidemic in Poland. 5.2. Market overview As in previous years, the financial results of the Group in the reporting period were strongly correlated with the situation in the market environment of the Parent. FERTILIZERS At the beginning of the year, winter grains entered dormancy as a result of winter cooling and were in good condition. At the end of February, temperatures went up and the plants resumed vegetation. Taking advantage of higher temperatures, farmers carried out first agri-tech activities, including sulfur and potassium fertilisation. As regards nitrogen fertilization, farmers had to refrain from application until early March due to the introduction of the Nitrates Directive. All in all, winter losses were assessed as low. The least promising crops were eliminated, the land thus made available for maize. In the second quarter, the condition of crops deteriorated due to the scarce rainfall and relatively low temperatures. May saw an increase in rainfall but that only slightly improved the condition of crops. In view of the above, the crop yield estimates were lower than originally assumed. In June, wheat and barley crops deteriorated due to high temperatures and low precipitation. The drought, while milder, continued into the next two months. The extraordinarily high temperatures significantly accelerated the vegetation cycle of crops. As at the end of August, losses caused by the drought were estimated at PLN 3bn (and the amount was not final). In 2020, a ‘Stop the Drought’ programme is to be launched to effectively prevent losses in crops caused by rainfall shortage. The difficult conditions for grains prevailed also in the last quarter of 2019. The period was very dry and, with only a few exceptions, there was no frost in December. The rapeseed grew too fast as for that season. All this aggravates the risk of diseases in plants in spring. The prices of main agricultural produce followed an upward trend in the first quarter, but started to fall in the second quarter. In the third quarter the downward trend continued for most agricultural produce. Quarter on quarter, there was a decrease in the prices of milling wheat (8%), milling rye (13%) and maize (7%). The prices of rapeseed, on the other hand, grew by 2% over four months (from June to September 2019). In the fourth quarter, trends in prices of agricultural produce varied. The price of milling wheat grew 1% quarter on quarter while milling rye lost 2%. In the middle of the fourth quarter, demand for wheat increased, driven mainly by demand from foreign markets. Milling wheat was loaded in ports, which also influenced wheat prices. The prices of maize rose slightly during the quarter, but year on year they were 10% lower. Stratégie Grains’ forecasts of grain production in Poland for the 2019/2020 season remained stable throughout the first quarter. At the beginning of the second quarter, the forecasts were increased slightly, to be eventually adjusted down based on data for the final weeks of the first half of 2019. In the third quarter, harvest forecasts for Poland indicated a downward trend. The forecasts dropped by a total of 1.6m tonnes for soft wheat, 0.76m tonnes for maize, and 0.34m tonnes for barley. Still, the final forecasts for the season indicated higher crop yields than in 2018. However, it was not the quantity but the quality of grain that was an issue. The only exception was maize, with yield forecasts down by 9% year on year. In the last quarter, the yield forecasts for soft wheat and barley remained stable, at 10.87 million tonnes and 3.35 million tonnes respectively. The maize harvest forecasts showed a slight increase (by 0.04 million tonnes), but on an annual basis maize production was expected to decrease year on year. Fertilizer sector – Poland In the reporting period, the demand for nitrogen fertilizers in Poland was driven by the following: • the level of fertilizer purchases made by farmers in November and December 2018 as well as from January to March 2019; • increased supply of imported fertilizers in March 2019; • difficult weather conditions; • difficult situation of agricultural farms due to low grain prices and limited purchases; farmers’ reluctance to sell crops in expectation of a price growth.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 29 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

At the beginning of the year, the demand for nitrogen fertilizers was considered good, with stable sales of products at retail outlets. The end of the first quarter saw a higher supply of imported fertilizers (both nitrogen and compound fertilizers). As a result, the volume of retail sales fell as soon as in April. Fertilizers for maize crops were the most popular. In July, farmers refrained from buying fertilizers in expectation of lower prices. In August, only small quantities of NPK fertilizers for rapeseed were sold. In the third quarter, sales of nitrogen fertilizers were lower than in the previous periods. The situation was caused mainly by reduced purchases of grains by companies and deferred sale of produce by farmers in anticipation that prices would go up. As a result, farmers reported problems with financial liquidity. Despite the disbursement of direct payments in the fourth quarter, demand for nitrogen fertilizers was considered low. From April to the end of the second quarter, there was a drop in the volumes of imported nitrogen fertilizers unloaded at ports. Nitrogen fertilizers – Europe In the first quarter of 2019, global prices of urea followed a downward trend and tended to stabilise. In mid-March the price decline slowed down. In the first quarter the prices fell about a dozen percent. The second quarter saw volatility in market prices of urea, with an upward trend driven by stronger demand for urea from India. Market speculations indicating a possible increase in demand of up to 1 million tonnes also played a part. In addition, despite the expected low demand for the product from Europe and the US in May and June, forecasts indicated that the prices would strengthen further. In the last week of June, urea prices began to stabilise. The price stabilisation in the period was an effect of the price growth in the US and the market awaiting the announcement of a new urea purchase campaign by India. From the beginning of the third quarter, prices declined in the markets under analysis. From mid-July demand for urea remained low and the proposed prices for the product were not found attractive by the market. In some parts of Europe, the season for urea ended, which did not support a price growth either. Buyers refrained from making purchases in expectation of further price declines, while sellers did not take much action because interest in the product remained poor. In the fourth quarter, urea prices continued on a downward trend. Market sentiment remained pessimistic due to lack of buying activity. The prices went down. The availability of the product was high, which did not help stop the unfavourable trend. Even though the downward trends mentioned above continued for many months, in 2019 the average annual market price of urea did not significantly differ from the 2018 level (it was only less than 5% lower). At the same time, the prices of natural gas and ammonia decreased significantly, reducing the variable cost of urea production. Figure 6. Monthly average prices of ammonia and urea [USD/t] 350 300 250 200 150 100 50 0

Urea

500 400 300 200 100 0

Ammonia

Year on year, the average market price of ammonia was 19% lower. At the same time, however, the price of natural gas, which is the main feedstock for ammonia production, was down by approximately

Grupa Azoty Zakłady Chemiczne Police S.A. Page 30 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

40% on 2018. As a result, ammonia prices relative to gas prices improved despite the decline in prices. Ammonia prices in H1 2019 followed a downward trend. A slowdown and global oversupply were seen on the market, driven by a range of factors, including poor weather conditions in the United States (starting from April) and the opening of new production facilities in Russia with an annual capacity of 1 million tonnes. Some plants underwent maintenance shutdowns, which probably reduced the size of the declines. At the same time, natural gas prices were considerably lower. In Q3 2019, ammonia prices were on a rise. The increase was caused by ongoing maintenance shutdowns. However, in the global markets a slowdown was observed. In the fourth quarter, ammonia prices stabilised at a level several percent above that recorded in the third quarter. Compound fertilizers – European and global markets Throughout 2019, the prices of DAP fertilizers were in a downward trend. From the beginning to the end of 2019, market prices of DAP fertilizers in the Baltic Sea area fell by 34%. The trend reversed at the beginning of 2020. The average price of DAP for 2019 was 18% lower than in 2018. In the first half of 2019, the demand for DAP in Europe was very weak. Very large volumes of the fertilizers were exported from Russia to Brazil and Argentina; the end of the second quarter was marked by increased exports to the Balkans. Small quantities were exported to the US, but considerable stocks and bad weather suppressed the demand compared with the same period of the previous year. Global oversupply led to price declines. A Saudi Arabian manufacturer signed a contract for the supply of 5 million tonnes of various phosphate fertilizers to India over five years. The first substantial volumes were already shipped at the end of the second quarter. Arab manufacturers delivered large volumes also to Australia, Brazil, Argentina, Kenya and Mauritius. Two Chinese plants were officially merged to form a company with a production capacity of up to 10 million tonnes of DAP/MAP/NPK and phosphoric acid. On the phosphate fertilizer market, the sentiment was positive in Western Europe, but in the Eastern European countries the climate was less favourable due to stronger price pressures. On a global basis, market prices were driven by oversupply. In Q3 2019, Russian producers continued to export significant quantities of DAP/MAP to Europe, the US and Latin America, but also supplied the internal market. Demand for DAP in Europe varied during the period: in Poland it was very weak throughout the quarter, strong in Slovakia but declining over time, while in Romania demand for DAP was on a rise until September, when sales were next to none following the end of the harvest season. In Q4 2019, Russian producers continued to export fertilizers to Latin America, especially to Brazil, as well as to Europe and Turkey. The main US producer also made significant shipments to Brazil, while domestic sales were very low. Sales on the Chinese market were also in a slump. Among European markets, only Bulgaria and Romania showed signs of recovery. The average market price of NPK 16-16-16 in 2019 was only 2% lower than in 2018, although its overall trend in 2019 had a downward shift. In the first six months of the year, market prices remained relatively high, with a slight downward trend. In the following periods, NPK fertilizer prices decreased further. However, against the backdrop of volatility in market prices of DAP the prices of NPK fertilizers appeared more stable. In the initial weeks of the first quarter, demand for NPK fertilizers in many European countries was still meagre. Higher sales were reported in Russia, Ukraine and Ireland. In Western Europe, demand was initially poor. At the beginning of the second quarter, NPK fertilizers season started in the UK and Ukraine. In April, a new plant was launched in Volkov, Russia, with the assumptions being that it will increase production of mineral fertilizers to 840 thousand tonnes annually. One of the largest manufacturers in Brazil, with annual production capacities of 6.2 million tonnes, closed down a few of its plants and distribution points. It owns 16 plants, where it manufactures fertilizers from imported materials. In Q2 2019, three Brazil-based mines owned by a US manufacturer were shut down for maintenance to improve occupational safety. To satisfy market demand in that period, the manufacturer imported phosphate rock from Peru (600 thousand tonnes) and Florida (300 thousand tonnes). Ukraine introduced import duties on products from Russia, and towards the end of the second quarter the Ukrainian government published a decree imposing an embargo on products from Russia, in particular fertilizers with HS codes between 3102 and 3105. Following these announcements, demand for Russian fertilizers grew, with medium to large farms showing the strongest interest. For fear of undersupply, fertilizers were bought in large quantities, pushing up the prices. The embargo on Russian products benefited other producers as it placed them in a better position to sell their products on the Ukrainian market.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 31 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 7. Monthly average prices of NPK and DAP fertilizers [USD/t] 600 500 400 300 200 100 0

DAP NPK

The third quarter saw a drop in the prices of compound fertilizers (in Russia from 6% to as much as 20% depending on the type and composition of the fertilizer). In Romania, demand for NPK fertilizers was low. Demand in Slovakia picked up after the harvest season was over. In Poland, farmers waited to the last moment to buy fertilizers. The fourth quarter saw a market downturn driving the prices down in the Baltic Sea area. Russian manufacturers successfully exported fertilizers to India, Brazil, Africa, Asia, Romania and the Balkan countries. In the middle of the fourth quarter, demand in Ukraine picked up, especially among large agroholdings. In the period under review, global interest in fertilizers was viewed as weak and most European markets were quiet. Buyers checked the prices, but refrained from making any purchases. Other products The Company’s RedNOX® segment (products designed to reduce nitric oxide emissions in the automotive sector and industry) includes the following: NOXy® (32.5% urea solution, AdBlue®); Likam® (ammonia water); Pulnox® (40% technical-grade urea solution). The Rednox market shows a strong growth trend in a longer term both in Poland and Europe. EU regulations on reducing flue gas emissions are very stringent and these products enable meeting EU standards in this respect.

RAW MATERIALS FOR MANUFACTURE OF FERTILIZERS Phosphate rock Throughout 2019 the prices of phosphate fertilizers on the global markets followed a downward trend. This market slump also had an effect on phosphorous-bearing materials for fertilizer production causing a year-on-year decline in the prices of phosphate rock and phosphoric acid. The average benchmark price of phosphate rock (North Africa, FOB) was down by ca. 12%, and that of phosphoric acid (West Europe, CFR) – by ca. 21%. A similar correction was seen in the price of phosphoric acid supplied to India, which went down by approximately 19% year on year. The demand for phosphate fertilizers declined on the back of a number of factors, including mainly the unclear trade relations between the US and China, a marked drop in demand for phosphate fertilizers in China and India, and the record high levels of DAP stocks in these countries. The waning demand prompted the leading Chinese manufacturers of phosphate fertilizers to reduce production by ca. 50% in the third and fourth quarter of 2019. In early 2019, the North American market faced adverse weather conditions which in many cases limited and even prevented the application of phosphate fertilizers. A significant oversupply of phosphate fertilizers in the US market led to further price corrections at the end of 2019 and prompted key global manufacturers to reduce exports to that market. In 2020, the situation on the market of phosphate fertilizers and key raw materials for their production will depend on how the coronavirus pandemic evolves. In early 2020, weather conditions in many regions of the world were favourable for, and in fact encouraged, intensive fertilizer application. However, there is a risk of logistic constraints in the transport of products. Given the characteristics of fertilizers as a product, many countries (including China) do everything to make sure that fertilizers reach the target customers to enable them to achieve planned yields. However, the current situation may lead to significant constraints, both in supply and demand.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 32 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Potassium chloride In 2019, the average benchmark price of potassium chloride (Baltic SPOT FOB) was up by approximately 5% on 2018. In the second half of 2019, the potassium chloride market was much weaker than in the first and second quarter of 2019. The spring application in the northern hemisphere, particularly in the US, was lower due to extremely unfavourable weather conditions which led to either delayed or reduced fertilization. Brazil was the only country which supported imports practically throughout the year. However, amid high stock levels and lower interest in purchases in the final distribution channel, also this market saw potassium chloride prices fall at the end of 2019. In response to the shrinking demand, in the fourth quarter of 2019 the main producers of potassium chloride reduced their output by a total of 2.8 million tonnes, a figure close to China’s normal quarterly imports volume. The output cuts eased the price depression to some extent, as evidenced by the price set for new contracts for the supply of potassium chloride to India. The new price is only down by approximately 3% relative to the price set forth in the 2018/2019 contracts. However, by signing contracts with effect only until the end of Q1 2020 India secured itself in case Chinese negotiations contribute to further declines in the price of potassium chloride in 2020. The main factor which will have the fundamental impact on the potassium chloride market further into 2020 are the developments related to the coronavirus pandemic. In the event of further restrictions and logistical problems, demand may be expected to shrink in the second quarter, leading to further decreases in potassium chloride prices for the final customer. The situation in the course of the year will depend on global developments, and any scenario is in fact possible. Sulfur 2019 proved a difficult year for prilled sulfur producers. A significant decline in the phosphate fertilizers market drove down the market of sulfur, which is a raw material used primarily in the production of phosphoric acid, which is further processed to manufacture DAP, MAP and NPK fertilizers. Year on year, the prices of prilled sulphur (Vancouver SPOT FOB) fell by about 41%. China, the leading buyer of prilled sulfur, recorded a dramatic drop in demand for the product already in early 2019, accompanied by a record increase in stocks at seaports. The decline in demand in China quickly brought about a price slump across global prilled sulfur markets. The European liquid sulfur market saw slightly milder declines. In 2019, the average price of liquid sulfur (Benelux Delivered) went up by approximately 8% year on year. However, in 2019 alone, the price of liquid sulfur fell by around 18%. On the one hand, producers tried to maintain higher prices as long as possible citing the tough supply situation on the European market (problems with contaminated Russian oil; higher share of sweet oil with lower sulphur content in the crude oil processed; logistical problems on the Rhine river, one of the main distribution channels for liquid sulfur; emergency shut-downs of refineries) while customers, on the other hand, cited falling prices on the prilled sulfur markets. Maintaining high prices of liquid sulfur could lead to an artificial increase in production costs, with a overall downward trend in prices of phosphate fertilizers. As a result, Q4 2019 saw the first liquid sulfur price cuts on the Western European market, caused by buyers’ pressure. The American liquid sulfur market is not subject to supply limitations observed in Europe, and prices on the Tampa market dropped by approximately 57% in 2019, following the overall downward trend on the prilled sulfur market. Because of the limited availability of appropriate vessels and the limited capacity of storage facilities at Western European ports, as well as the high storage costs, the drivers and dynamics of liquid sulfur prices on the US market are not the same as on the European market. After price reductions in Q4 2019, the European liquid sulfur market continued the downward trend, with a price correction in Q1 2020. In view of the coronavirus pandemic, the coming quarters may see disruptions in both supply and demand. In Q2 2020, prices of liquid sulfur in Western Europe are expected to remain unchanged, while prices of prilled sulfur are expected to increase. However, analysts emphasise that this may be just a temporary reaction of the market. Depending on how the situation develops, various scenarios are possible with sulfur prices going both down and up. Natural gas 2019 saw a decline in gas prices on the European markets. The average annual gas prices at Western European hubs fell by approximately 40% on 2018. Gas prices were steadily falling from the beginning of the year, reaching a record low of EUR 9.4/MWh in September. In subsequent months, gas prices went up as air temperatures decreased. At the end of the year, the price was EUR 13.3/MWh, which was still a rather low level for that season of the year.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 33 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

In 2019, the drop was supported by record LNG supplies to Europe, declining coal prices, and warmer weather compared with the long-term average. The pressure on gas prices was reinforced by high volumes of gas stored in European gas storage facilities. Figure 8. Market prices of natural gas [EUR/MWh] 30 25 20 15 10 5 0

Gas

Lower gas prices in Europe were also driven by lower prices of the product in the US and Asian markets. Another important factor was the geopolitical situation, including the USA-China trade war and the global economic slowdown. PIGMENTS Titanium white The average price of titanium white on the European market in 2019 went down 8.8% year on year. Most global markets saw a decrease in the prices of titanium white in H1 2019 as a result of the continued downward trend triggered in the second half of 2018 by imports of large volumes of pigments from China to Europe and a demand slump caused by the risk factors present on the market, such as the US-China trade war, Brexit and the economic slowdown in the European Union. This led to higher stock levels at customers. Seasonality, not seen on the market for two years, was back again early in the year, manifesting itself in lower demand for titanium white from the paints and coatings sector. The availability of TiO2 obtained in the sulfate process is generally higher than that of TiO2 obtained by chloride process. A recovery began in the second quarter of the year, with a seasonal increase in demand. The weakening of the Chinese yuan and the two series of price increases introduced by Chinese producers at the beginning of the year led to a modest decrease in interest in Chinese titanium white, thus preventing any sharper declines in titanium white prices in Europe. The prices were also affected by price stabilisation programmes implemented by the key global producers of titanium white (Chemours and Tronox). The stabilisation, however, was achieved at the expense of a year-on-year decline in sales volumes. The prices remained stable until the end of the third quarter, but then, owing to a seasonal decline in demand in the fourth quarter, another series of titanium white price reductions in Europe was recorded. In addition to weather conditions, the price-affecting factors included unresolved issues related to the trade war and Brexit and the economic slowdown in the European Union and the global automotive market. The supply and demand balance observed at the end of 2019 was to some extent affected by the partial launch of new production capacities by Lomon Billions of Jiaozuo, China, with a total target annual capacity of 200,000 tonnes. The new capacity will increase the global supply potential for titanium white obtained by the chloride process. The increase is likely to be more pronounced already in the first half of 2020. In subsequent periods, the price trends for titanium white will be principally driven by the global economic conditions. In early 2020, the coronavirus epidemic started to pose a risk to global economic growth. According to IMF’s announcements published in early March 2020, the global economic growth in 2020 may be lower year on year due to the epidemic outbreak. The IMF stated that it is not possible today to assess the impact the epidemic on the global economic landscape. The potential economic slowdown may affect demand for titanium white in 2020, with the impact depending on how the risk escalates. Also the construction and automotive industries may be facing a difficult period. Due to the growing prices of titanium-bearing minerals, Chinese and US producers sought to increase the prices. However, buyers are strongly opposed to this move in view of the COVID-19 pandemic. At best, prices are expected to stay flat. Price cuts are also possible, but the largest global producers (Chemours and Tronox) are not giving up on the price stabilisation programmes implemented in 2019.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 34 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 9. Monthly average prices of titanium white in 2019 [EUR/t] 3 000

2 500

2 000

1 500

Titanium white

The factor that can affect the industry’s activities is the classification of TiO2 as a substance that may cause cancer (category 2, by inhalation). In February 2020, Commission Delegated Regulation (EU) 2020/217 was published, concerning, among other things, the classification of TiO2. The Regulation will take effect on October 1st 2021, which gives the producers and users of the substance a time to adapt the processes used to the new regulations. Due to a lack of suitable replacement for TiO2, the classification is not expected to cause any material decrease in demand for titanium white after the Regulation takes effect. Other products Iron sulfate is a by-product of titanium white and steel production. 2019 saw increased demand for sulfate, supported by positive developments on the market. The demand was driven by a good situation in the construction sector in Europe, resulting in a high cement production volume until the end of 2019. Additionally, following reports of a scheduled shutdown of the competing Pori plant, some customers are already planning to purchase larger volumes of sulfate. RAW MATERIALS FOR MANUFACTURE OF PIGMENTS Ilmenite and titanium slag Due to a continued decline in titanium white prices, since mid-2018 prices of ilmenite have also been decreasing. In the representative Chinese market, the average price of ilmenite in 2019 was USD 180/t EXW, down by approximately 8% year on year. The prices of ilmenite stabilised following stabilisation of titanium white prices in Q2 2019. Titanium slag is a metallurgical product obtained by smelting ilmenite with coke. In the absence of investments in new furnaces, there is a clear undersupply on the titanium slag market, especially in the case of slag with a 74% to 76% titanium content, which is used for the production of titanium white in the sulfate process. Some of its existing producers switched from the production of slag with a low titanium content to slags with a higher content of TiO2, in excess of 90%, encouraged by higher sales margins in the segment which employs the chlorine process to obtain titanium white. Thus, despite falling prices of titanium white, the global price of titanium slag remains high. In 2019 in Europe, the average price of titanium slag used in the manufacture of titanium white using the sulfate process was approximately USD 621/tonne FOB, up by about USD 16/tonne (2.6%) year on year.

CO2 EMISSION ALLOWANCES MARKET

In 2019, the prices of CO2 emission allowances (EUAs) on the exchange market ranged high between EUR 19 and EUR 30. The price climbed to a multi-year high of approximately EUR 30 in the second half of July. In the subsequent months, the prices stabilised between EUR 22 and EUR 27. The classification of emission allowances as financial instruments in accordance with the MIFID II Directive adds to the risk of price increases.

The Company purchased allowances for 2019 and 2020–2021 based on a common model of CO2 emission allowance management applicable at the Grupa Azoty Group and an approved procurement plan. In the reporting year, the Parent took measures to adjust to the changed situation and mitigate the negative financial impact of higher EUA prices, purchasing allowances during temporary market declines. As at the reporting date of December 31st 2019, the Company held a sufficient number of allowances to meet its obligations related to the settlement of CO2 emissions for 2019.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 35 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

5.3. Key financial and economic data In 2019, the Group delivered a solid year-on-year improvement in performance. In the reporting period, consolidated EBITDA came in at PLN 175,222 thousand, up PLN 53,207 thousand on 2018. The Company believes that both consolidated and separate results for 2019 would have been better if the shutdowns of the ammonia and urea units had not been prolonged due to the defect detected in the ammonia unit (for details, see section 5.1 of this Report). In 2019, the Group’s net profit stood at PLN 43,537 thousand, up by PLN 77,156 thousand year on year. The 2018 result was additionally affected by non-recurring items related to the deconsolidation of the subsidiary AFRIG S.A. (effect on net profit/loss: PLN -44m). Table 16. Consolidated financial results Item 2019 2018 change % change Revenue 2,432,318 2,421,347 10,971 0.5 Cost of sales 2,102,101 2,131,442 -29,341 -1.4 Gross profit 330,217 289,905 40,312 13.9 Selling and distribution expenses 107,417 112,537 -5,120 -4.5 Administrative expenses 175,589 160,901 14,688 9.1 Net profit on sales 47,211 16,467 30,744 186.7 Other income/(expenses) 1,043 -8,229 9,272 112.7 EBIT 48,254 8,238 40,016 485.7 Finance income/(costs) -5,787 -61,619 55,832 90.6 Share of profit/(loss) of equity-accounted 12,499 12,317 182 1.5 associates Profit before tax 54,966 -41,064 96,030 233.9 Income tax 11,429 -7,445 18,874 253.5 Net profit/(loss) 43,537 -33,619 77,156 229.5 EBITDA 175,222 122,015 53,207 43.6

In 2019, the Parent posted net profit and EBITDA of PLN 60,487 thousand and PLN 194,253 thousand, respectively. The year-on-year improvement in the Parent’s performance was mainly attributable to the lower price of natural gas. A year-on-year increase in the average prices of compound fertilizers and urea also helped boost the sales margins.

Table 17. Financial results of the Parent Item 2019 2018 change % change Revenue 2,419,091 2,411,461 7,630 0.3 Cost of sales 2,106,134 2,138,456 -32,322 -1.5 Gross profit 312,957 273,005 39,952 14.6 Selling and distribution expenses 107,417 112,549 -5,132 -4.6 Administrative expenses 137,402 129,019 8,383 6.5 Net profit on sales 68,138 31,437 36,701 116.7 Other income/(expenses) 514 -4,727 5,241 110.9 EBIT 68,652 26,710 41,942 157.0 Finance income/(costs) -1,961 6,480 -8,441 -130.3 Profit before tax 66,691 33,190 33,501 100.9 Income tax 6,204 3,658 2,546 69.6 Net profit/(loss) 60,487 29,532 30,955 104.8 EBITDA 194,253 139,788 54,465 39.0

Grupa Azoty Zakłady Chemiczne Police S.A. Page 36 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

5.3.1. Segments’ financial results The long-term business cycles in the individual segments and the current factors driving demand and price change trends contributed to a significant improvement in the Fertilizers Segment’s performance relative to 2018. The results posted by the Pigments Segment, which passed the peak of another business cycle (2017–2018), were lower than in the previous year. Nonetheless, in 2019 the Pigments Segment delivered a healthy EBIT of PLN 29,261 thousand. In the same period, the Fertilizers Segment’s EBIT reached PLN 24,782 thousand, a steep increase on 2018. The considerable improvement in the Fertilizers Segment’s performance was mainly attributable to more favourable relations between product and raw material/feedstock prices, including the marked decline in natural gas prices. Table 18. Performance by segment in 2019 Grupa Azoty POLICE Group Parent Item Fertilizer Other Fertilizer Other Pigments Polymers Pigments s Activities s Activities Revenue from 2,021,090 350,130 552 60,546 o 2,025,132 350,524 43,435 external sales Share 83% 14% 0% 3% o 84% 14% 2% EBIT 24,782 29,261 -16,645 10,856 24,915 29,203 14,534

Figure 10. The Group’s revenue by segment

2 400 000

2 000 000 2018 1 600 000 2019

1 200 000

800 000

Segment Segment Fertilizers

400 000 Pigments

Polymers Other Activities 0

Figure 11. The Group’s revenue structure by segment

2019 2018 2% 0.023% 3% 0.002% 14% 16%

Fertilizers Pigments Polymers Other

82% 83%

The shares of individual segments in total revenue changed slightly year on year: the Fertilizers Segment’s share increased (by 1 pp), while that of the Pigments Segment fell (by less than 2 pp), with the share of other sales largely unchanged. Revenue generated by the Polymers segment is immaterial, as the Polimery Police project is still under way and the segment has not yet commenced its proper operations.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 37 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

FERTILIZERS EBIT generated by the Group in the Fertilizers Segment in 2019 was PLN 24,782 thousand, up by approximately PLN 90m on the 2018 figure. The improvement was mainly seen in nitrogen products (a year-on-year decline in gas prices and increase in urea prices). The potential for even better performance in nitrogen fertilizers was suppressed by a boiler defect at the ammonia unit discovered during a maintenance shutdown, which resulted in a temporary shutdown of the ammonia and urea units. The prolonged shutdown of the units caused a significant decrease in the volumes of nitrogen products (including urea) sold and a loss of margins, which the Company believes were very likely to have been achieved if the units had operated normally. In the reporting period, the Fertilizers Segment earned PLN 2,021,090 thousand in revenue, representing 83% of the Group’s total revenue. The Segment’s revenue rose by 2% relative to 2018, driven chiefly by a significant increase in the selling prices of fertilizers, with a nearly 2% increase in the sales volume of compound fertilizers. The increase was mainly halted by lower sales volumes of urea due to the prolonged shutdown of the units.

Figure 12. Consolidated revenue of the Fertilizers Segment

700 000 2 500 600 000 2 000 500 000 400 000 1 500 300 000 1 000 200 000 500 100 000

0 0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018 2019 2014 2015 2016 2017 2018 2019

The impact of the increase in product prices on performance was stronger than the impact of the parallel increase in purchase prices of strategic raw materials (except for the lower gas prices), hence the improved margins on fertilizer sales. Prices of natural gas for consumption dropped by 27% year on year. The prolonged maintenance shutdowns of ammonia and urea units translated into significantly lower sales volumes of nitrogen products. In the reporting period, compound fertilizers had the highest share in the Company’s revenue by product group, representing approximately 76% of the Segment’s total revenue. On average, domestic fertilizer and ammonia sales accounted for 69% of the Segment’s total sales.

PIGMENTS In 2019, the Pigments Segment posted EBIT of PLN 29,261 thousand and although it was markedly lower than the robust figure posted for 2018 (a period of economic upturn), it did not materially differ from the average for the previous decade. The Segment’s performance was affected primarily by lower selling prices of titanium white, which fell in line with the current market trend. In 2019, sales volumes of titanium white were close to the 2018 levels. The revenue from sale of titanium white decreased by 12% year on year, mainly on the back of lower average selling prices. The third quarter of 2018 marked the beginning of price declines, triggering a downward trend reflecting the changes occurring on the market. In Q1 2019, customers reduced their stocks and seasonality emerged on the market again after almost two years. A seasonal pick-up in demand was recorded, however, in Q2 2019, which stabilised the pigments market. In the reporting period, the Pigments Segment’s revenue came to PLN 350,130 thousand, accounting for 14% of the Group’s total. Approximately 57% of the revenue from titanium white was derived from sales on foreign markets.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 38 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 13. Consolidated revenue of the Pigments Segment

120 000 500 100 000 400 80 000 300 60 000 40 000 200 20 000 100

0

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 0 2018 2019 2014 2015 2016 2017 2018 2019

POLYMERS In 2018, the share of Grupa Azoty Polyolefins S.A.’s assets in total assets of all segments of the Group exceeded 10%. Therefore, a condition for identifying a separate reportable segment was met, i.e. one of the quantitative thresholds specified in IFRS 8 Operating Segments was exceeded. By the Parent Management Board’s decision, Grupa Azoty Polyolefins S.A. was separated from Other Activities and is currently presented under a newly identified reportable segment, namely the Polymers Segment. As the Polimery Police project is still under way, the Polymers Segment has not yet commenced its proper operations; it generates immaterial revenue, while incurring day-to-day running costs. For a detailed description of the project, see Section 4.3 of this Report. OTHER ACTIVITIES Revenue recognised under Other Activities accounts for approximately 3% of the Group’s total sales. Other Activities generated an operating profit of PLN 10,856 thousand for the Group, close to the 2018 figure. 5.3.2. Operating expenses The Group’s operating expenses were PLN 2,379,752 thousand in 2019, down by 1.2% on 2018. The decrease occurred mainly in raw materials and consumables used (which represented 66% of total operating expenses in 2019). The decrease in raw materials and consumables used in the nitrogen fertilizers area was mainly driven by lower output caused by the temporary shutdown of the ammonia and urea units (a boiler defect at the ammonia unit) and a lower price of gas. At the same time, the reporting period saw a year-on-year increase in the prices of other key raw materials for the production of phosphate fertilizers, including potassium chloride, phosphate rock and titanium slag (in the case of titanium white) . The completion of a number of investment projects and major overhauls resulted in higher depreciation charges. Wages and salaries, including surcharges, increased year on year, chiefly due to the execution of collective pay agreements and an increase in provisions for employee benefit obligations compared with 2018. Table 19. Group’s costs by nature of expense Item 2019 2018 change % change Amortisation and depreciation 126,968 113,777 13,191 12 Raw materials and consumables used 1,576,523 1,614,516 -37,993 -2 Services 171,508 166,879 4,629 3 Wages and salaries, including surcharges, and 380,660 355,430 25,230 7 other benefits Taxes and charges 92,149 124,721 -32,572 -26 Other costs by nature of expense 31,944 34,482 -2,538 -7

Grupa Azoty Zakłady Chemiczne Police S.A. Page 39 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Table 20. Parent’s costs by nature of expense Item 2019 2018 change % change Amortisation and depreciation 125,601 113,078 12,523 11 Raw materials and consumables used 1,555,976 1,592,739 -36,763 -2 Services 248,893 246,306 2,587 1 Wages and salaries, including surcharges, and 285,916 265,050 20,866 8 other benefits Taxes and charges 88,218 121,763 -33,545 -28 Other costs by nature of expense 30,188 33,195 -3,007 -9

The decrease in taxes and charges was mainly attributable to lower cost of CO2 emission allowances (lower ammonia output) and excise duty.

5.3.3. Structure of assets, equity and liabilities In 2019, the Group’s assets were PLN 2,933,500 thousand, having increased by 24% on the end of 2018. As at December 31st 2019, the amount of non-current assets was PLN 1,837,782 thousand, and current assets were PLN 1,095,718 thousand. Table 21. Structure of the Group’s assets Item 2019 2018 change % change Non-current assets, including: 1,837,782 1,637,006 200,776 12 Property, plant and equipment 1,541,713 1,472,067 69,646 5 Perpetual usufruct of land 0 6,224 -6,224 -100 Right-of-use assets 74,594 0 74,594 - Investment property 6,837 6,168 669 11 Intangible assets 77,382 48,784 28,598 59 Equity-accounted investees 26,365 26,180 185 1 Other receivables 76,900 32,888 44,012 134 Deferred tax assets 33,991 44,695 -10,704 -24 Current assets, including: 1,095,718 731,429 364,289 50 Inventories 371,070 315,843 55,227 17 Property rights 83,121 55,291 27,830 50 Current tax assets 6,978 8,493 -1,515 -18 Derivative financial instruments 157 0 157 - Other financial assets 0 2,951 -2,951 -100 Trade and other receivables 169,886 181,159 -11,273 -6 Cash and cash equivalents 445,456 160,209 285,247 178 Non-current assets held for sale 19,050 7,483 11,567 155 Total assets 2,933,500 2,368,435 565,065 24

Year on year, the most significant movements in assets in 2019 included: • a 5% (PLN 69,646 thousand) increase in property, plant and equipment, attributable to new investment projects having been placed in service, • a PLN 28,598 thousand increase in intangible assets, driven mainly by a substantial increase in intangible assets under construction at the subsidiary Grupa Azoty Polyolefins S.A., related to payments under licence agreements, • a PLN 44,012 thousand increase in other long-term receivables resulting mainly from prepaid deliveries of non-current assets totalling PLN 39,888 thousand, recognised by Grupa Azoty Polyolefins S.A., • recognition of PLN 74,594 thousand in right-of-use assets, disclosed in the statement of financial position in 2019, as a result of the application of IFRS 16 Leases in the Company’s financial

Grupa Azoty Zakłady Chemiczne Police S.A. Page 40 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

statements. The main contributor to the level of right-of-use assets was the perpetual usufruct rights to land identified during the implementation of IFRS 16, • a 17% (PLN 55,227 thousand) increase in inventories, caused chiefly by a significant increase in materials (by PLN 31,917 thousand) as well as semi-finished and finished products (by PLN 22,996 thousand in total) at the Parent, • a PLN 285,247 thousand increase in cash and cash equivalents held in bank accounts, including mainly as a result of significant cash inflows from financing activities at the subsidiary Grupa Azoty Polyolefins S.A. (share issue at Grupa Azoty Polyolefins S.A. and cash pooling).

Table 22. Structure of the Group’s equity and liabilities Item 2019 2018 change % change Equity 1,337,126 1,199,963 137,163 11 Non-current liabilities, including: 531,230 465,120 66,110 14 Borrowings 243,331 297,140 -53,809 -18 Lease liabilities 63,973 7,953 56,020 704 Employee benefit obligations 79,410 65,704 13,706 21 Other liabilities 12,736 3,873 8,863 229 Provisions 111,213 68,018 43,195 64 Grants 20,567 22,369 -1,802 -8 Deferred tax liability 0 63 -63 -100 Current liabilities, including: 1,065,144 703,352 361,792 51 Borrowings 360,267 60,011 300,256 500 Other financial liabilities 84,625 22,514 62,111 276 Lease liabilities 5,737 2,761 2,976 108 Employee benefit obligations 14,230 8,540 5,690 67 Current tax liabilities 1 59 -58 -98 Trade and other payables 582,153 602,559 -20,406 -3 Provisions 4,256 4,727 -471 -10 Grants 2,235 1,986 249 13 Liabilities directly related to assets held for 11,640 195 11,445 5869 sale Total liabilities 1,596,374 1,168,472 427,902 37 Total equity and liabilities 2,933,500 2,368,435 565,065 24

Significant changes in the Group’s equity and liabilities in the reporting period: • an 11% (PLN 137,163 thousand) increase in the Group’s equity vs 2018, driven mainly by an increase in equity attributable to non-controlling interests (acquisition of a portion of new shares in Grupa Azoty Polyolefins S.A. by Grupa Azoty S.A.) and a significant year-on-year increase in net result for the reporting period, • a 14% (PLN 66,110 thousand) increase in non-current liabilities vs 2018, primarily as a result of a PLN 56,020 thousand increase in non-current lease liabilities following the implementation of IFRS 16 Leases and a PLN 43,195 thousand increase in non-current provisions. The effect of the increases was offset by an 18% (PLN 53,809 thousand) decline in non-current liabilities under borrowings, • a PLN 300,256 thousand increase in current liabilities under borrowings, mainly as a result of recognition of liabilities under a negative cash pooling balance of PLN 251,552 thousand at the subsidiary Grupa Azoty Polyolefins S.A. Table 23. Structure of the Parent’s assets Item 2019 2018 change % change Non-current assets, including: 1,820,458 1,689,348 131,110 8 Property, plant and equipment 1,391,731 1,372,529 19,202 1 Perpetual usufruct of land 0 4,959 -4,959 -100

Grupa Azoty Zakłady Chemiczne Police S.A. Page 41 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Right-of-use assets 54,942 54,942 - Investment property 27,665 27,693 -28 0 Intangible assets 17,241 18,425 -1,184 -6 Shares 306,116 238,248 67,868 28 Other receivables 1,368 513 855 167 Deferred tax assets 21,395 26,981 -5,586 -21 Current assets, including: 667,240 605,846 61,394 10 Inventories 369,879 314,966 54,913 17 Property rights 83,121 55,291 27,830 50 Current tax assets 6,978 8,493 -1,515 -18 Other financial assets 14,871 2,951 11,920 404 Derivative financial instruments 157 0 157 - Trade and other receivables 152,835 175,117 -22,282 -13 Cash and cash equivalents 39,399 32,913 6,486 20 Non-current assets held for sale 0 16,115 -16,115 -100 Total assets 2,487,698 2,295,194 192,504 8

In 2019, the Company’s assets rose to PLN 2,487,698 thousand, or 8% on the end of 2018. As at December 31st 2019, non-current assets stood at PLN 1,820,458 thousand, and current assets at PLN 667,240 thousand. Year on year, the most significant changes in assets included: • recognition of PLN 54,942 thousand in right-of-use assets, compared with perpetual usufruct rights to land worth PLN 4,959 thousand in 2018, as a result of the application of IFRS 16 Leases in the Company’s financial statements. The main contributor to the level of right-of-use assets was the perpetual usufruct rights to land identified during the implementation of IFRS 16; • a 28% (PLN 67,868 thousand) increase in the value of shares, attributable mainly to the acquisition of PLN 65,511 thousand worth of financial assets in Grupa Azoty Polyolefins S.A.; • a 17% (PLN 54,913 thousand) increase in inventories, driven by a significant increase in materials (by PLN 31,917 thousand) as well as semi-finished and finished products (by PLN 22,996 thousand in total) at the Company; • reclassification of the disposal of the subsidiary Supra Agrochemia Sp. z o.o. following the Company Management Board’s decision to sell that company’s properties rather than its shares. As a result, PLN 14,871 thousand (loans advanced, net) was recognised in other financial assets, and PLN 2,357 thousand (net shares) in shares, compared with PLN 16,115 thousand worth of non- current assets held for sale recognised in the previous year. Significant changes in the Company’s equity and liabilities in the reporting period: • an increase in equity due to, inter alia, net profit of PLN 60,487 thousand for 2019 vs net profit of PLN 29,532 thousand earned the year before. In addition, retained earnings for the reporting period increased following the allocation of the Company’s entire net profit for 2018 to statutory reserve funds, • a PLN 45,765 thousand increase in long-term lease liabilities following the application of IFRS 16 Leases, mainly attributable to perpetual usufruct rights to land identified during the implementation of IFRS 16, • a PLN 53,809 thousand decrease in non-current liabilities under borrowings as a result of their gradual repayment, • a PLN 43,240 thousand increase in long-term provisions due to a change in provisions for environmental protection, • a 12% increase in the carrying amount of total current liabilities, mainly on the back of a PLN 48,734 thousand increase in borrowings and a PLN 62,111 thousand increase in other financial liabilities, with a parallel 5% (PLN 32,414 thousand) decline in trade and other payables.

Table 24. Structure of the Parent’s equity and liabilities Item 2019 2018 change % change Equity 1,208,154 1,149,971 58,183 5

Grupa Azoty Zakłady Chemiczne Police S.A. Page 42 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Non-current liabilities, including: 494,696 445,681 49,015 11 Borrowings 243,331 297,140 -53,809 -18 Lease liabilities 49,988 4,223 45,765 1084 Employee benefit obligations 66,844 53,441 13,403 25 Other liabilities 2,863 645 2,218 344 Provisions 111,103 67,863 43,240 64 Grants 20,567 22,369 -1,802 -8 Current liabilities, including: 784,848 699,542 85,306 12 Borrowings 108,745 60,011 48,734 81 Other financial liabilities 84,625 22,514 62,111 276 Lease liabilities 3,832 1,508 2,324 154 Employee benefit obligations 11,380 6,618 4,762 72 Trade and other payables 570,028 602,442 -32,414 -5 Provisions 4,003 4,463 -460 -10 Grants 2,235 1,986 249 13 Total liabilities 1,279,544 1,145,223 134,321 12 Total equity and liabilities 2,487,698 2,295,194 192,504 8

5.3.4. Financial ratios Profitability As a result of improved financial performance in 2019, all profitability ratios of the Group were higher year on year. The same was reported for the Parent’s profitability ratios. The considerable year-on-year increase in the return on non-current assets, net profit, ROA, ROCE and ROE reported by the Group as at December 31st 2019 was caused by the effects of deconsolidation of AFRIG S.A., which weighed down on the net financial result in 2018.

Table 25. Profitability ratios Grupa Azoty POLICE Parent Ratio Group 2019 2018 2019 2018 Gross profit margin 14% 12% 13% 11% EBIT margin 2% 0% 3% 1% EBITDA margin 7% 5% 8% 6% Net profit margin 2% -1% 3% 1% ROA 1% -1% 2% 1% ROCE 3% 0% 4% 2% ROE 3% -3% 5% 3% Return on non-current assets 2% -2% 3% 2% Ratio formulas: Gross profit margin = gross profit (loss) / revenue (statement of comprehensive income by function) EBIT margin = EBIT / revenue EBITDA margin = EBITDA / revenue Net profit 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

Compared with the previous year, operating profit margins reflected favourable revenue-to-cost ratios, particularly in Fertilizers.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 43 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Liquidity Liquidity ratios remained broadly flat on the 2018 levels, with a 0.2 pp growth in cash ratio, driven by a year-on-year increase in the Group’s cash and cash equivalents. Table 26. Liquidity ratios Grupa Azoty POLICE Parent Ratio Group 2019 2018 2019 2018 Current ratio 1.0 1.0 0.9 0.9 Quick ratio 0.7 0.6 0.4 0.4 Cash ratio 0.4 0.2 0.1 0.1 Ratio formulas: Current ratio = current assets / current liabilities Quick ratio = (current assets - inventories - current prepayments and accrued income) / current liabilities Cash ratio = (cash + other financial assets) / current liabilities. Operating efficiency In 2019, the Group’s inventory turnover period lengthened by 11 days relative to 2018. The Group’s average payment and collection periods slightly shortened, by two days. The cash conversion cycle ratio remained negative, but less so. Similar trends were also observed at the Parent. Table 27. Operating efficiency ratios Grupa Azoty POLICE Parent Ratio Group 2019 2018 2019 2018 Inventory turnover period (days) 64 53 63 53 Average collection period (days) 25 27 23 26 Average payment period (days) 100 102 97 101 Cash conversion cycle -11 -22 -11 -22 Ratio formulas: Inventory turnover in days = (inventory * 360) / cost of sales Average collection period in days = (trade and other receivables * 360) / revenue Average payment period in days = (trade and other payables * 360) / cost of sales Cash conversion cycle = inventory turnover in days + average collection period in days - average payment period in days Debt The Parent’s total debt ratio increased 5 pp year on year in 2019, as total liabilities grew faster than total assets (37% vs 24%, respectively), reflecting a major increase in current liabilities under borrowings (a subsidiary’s cash pool). For the same reasons, a 6 pp increase in the short-term debt ratio was recorded, with a parallel slight 2 pp decrease in the long-term debt ratio. The Company’s debt ratios as at the end of 2019 were close to those achieved in the previous year. Table 28. Debt ratios Grupa Azoty POLICE Parent Ratio Group 2019 2018 2019 2018 Total debt ratio 54% 49% 51% 50% Long-term debt ratio 18% 20% 20% 19% Short-term debt ratio 36% 30% 32% 30% Equity-to-debt ratio 84% 103% 94% 100% 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

Grupa Azoty Zakłady Chemiczne Police S.A. Page 44 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

5.4. Management of capital andassets In the reporting period, the financial results of the Group were closely correlated with the market environment. This correlation, still observed and confirmed on the market, remains beyond the Group’s direct influence or control. The Company identifies and manages its liquidity risk, and follows an active cash flow (payables and receivables) management policy by using such tools as trade credit and advance payment in the settlement of sale transactions, as well as control of payment deadlines in purchase transactions. In 2019, the insurance of trade receivables arising from sales of fertilizers, urea, titanium white and chemicals was continued. The insurance covers both domestic and export trade receivables, in three currencies: PLN, EUR and USD. The currency risk is mitigated by natural hedging, that is balancing revenue and expenses in the same currency arising from the purchase of key raw materials and feedstocks with sales of products for export. Additionally, a surplus in the euro is used to cover a deficit in the US dollar. In 2019, the Company added forward contracts to its portfolio to hedge a portion of its planned net long foreign exchange position denominated in EUR. To secure liquidity, the Company uses external sources of financing. Loans are repaid using current cash flows, but a safe level of credit reserve is always maintained for use when necessary. Since April 2015, the Parent has been a party to an agreement for intragroup financing between Grupa Azoty S.A., Grupa Azoty Zakłady Azotowe Puławy S.A., Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. and the Company. Under the agreement, additional financing for short- and long-term corporate needs is available to the Parent.

5.5. Bank deposits The Parent invests free cash held in bank accounts in overnight deposits or negotiable term deposits. As a participant with a positive cash position, the Company uses the interest rate on pooled cash as part of a physical cash pool service rendered under an agreement with PKO BP S.A.

5.6. Borrowings The Grupa Azoty Police Group did not enter into or terminate any bank loan or other loan agreements in 2019. The Group repaid all its borrowings when due, and there is no threat to the Group’s ability to service its debt. Table 29. The Group’s liabilities under bank loans as at December 31st 2019* Bank / Outstanding Loan amount Currency Type of liability balance PKO BP S.A. 209,200 PLN 131,014 Overdraft facility

PKO BP S.A. 62,000 PLN 15,669 Multi-purpose credit facility limit**

BGK S.A. 80,000 PLN 0 Overdraft facility BGK S.A. 20,000 EUR 16,000 Non-revolving working capital facility

* In nominal terms. ** The facility limit used as a working capital loan and guarantees. As at December 31st 2019, the Parent used an overdraft facility under an agreement between the Grupa Azoty Group and PKO BP S.A., supported by an additional physical cash pooling service. The facility agreement expires on September 30th 2022. The Parent’s facility limit is PLN 200,500 thousand. The outstanding amount of PLN 80,000 thousand is disclosed as long-term debt as it is earmarked for the financing of the Parent’s long-term investments in property, plant and equipment, while the balance of PLN 51,014 thousand is disclosed as short-term debt used to finance the Parent’s day-to-day operations.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 45 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Under the same credit facility, the following limits are available to the subsidiaries: • KONCEPT Sp. z o.o. PLN 200 thousand, • Grupa Azoty POLICE Serwis Sp. z o.o. PLN 8,000 thousand, • Grupa Azoty Transtech Sp. z o.o. PLN 400 thousand, • Zarząd Morskiego Portu Police Sp. z o.o. PLN 100 thousand. As at December 31st 2019, none of the subsidiaries had any overdraft debt outstanding at PKO BP S.A. Grupa Azoty Polyolefins S.A. is the sole company with no access to any credit facility, although the company uses an intraday overdraft limit under a physical cash pooling agreement with PKO BP S.A. PLN 251,522 thousand was drawn under the PLN 470,000 thousand limit as at December 31st 2019. The Parent uses a multi-purpose credit facility of PLN 62,000 thousand under an agreement with PKO BP S.A. As at December 31st 2019, PLN 5,000 thousand was outstanding under the working capital facility and PLN 10,669 thousand was drawn for guarantees. The balance, of PLN 46,331 thousand, remains available to be used for further guarantees, letters of credit and as a working capital facility. The agreement expires on September 30th 2022. In January 2017, the Parent executed a PLN 80,000 thousand overdraft facility agreement with Bank Gospodarstwa Krajowego. As at December 31st 2019, no debt was outstanding under the agreement. The agreement was effective until January 24th 2020. On March 5th 2020 (after the reporting date), the Parent signed a PLN 100,000 thousand overdraft facility agreement. The funds received under the agreement will be used to finance general corporate needs related to the Parent’s business. The agreement expires on January 23rd 2023. In December 2018, the Parent signed a EUR 20,000 thousand non-revolving working capital facility agreement with Bank Gospodarstwa Krajowego. As at December 31st 2019, the amount drawn under the facility was EUR 16,000 thousand. The agreement expires on December 31st 2023. The facility from BGK was used by the Grupa Azoty Police Group to refinance existing debt under the multi- purpose line of credit with BGŻ BNP Paribas S.A., assumed by the Parent as a co-borrower but drawn solely by AFRIG S.A. The Parent still has a recourse claim against AFRIG S.A. with regard to the obligation to repay the equivalent of the facility drawn by the subsidiary (EUR 20,079 thousand plus service costs). The terms of the facility servicing and repayment are set out in a trilateral agreement between the Grupa Azoty Police Group, AFRIG S.A. and DGG ECO Sp. z o.o. Table 30. The Group’s liabilities under borrowings from related parties as at December 31st 2019* Related party / Amount Currency Outstanding balance Type of liability

Grupa Azoty S.A. Loan to pay for share capital of Grupa 60,000 PLN 60,000 Azoty Polyolefins S.A.

* In nominal terms.

PLN 60,000 thousand loan to finance payment towards the share capital of the subsidiary Grupa Azoty Polyolefins S.A., advanced by Grupa Azoty S.A. on September 14th 2015 under the Intragroup Financing Agreement of April 23rd 2015. Table 31. The Group’s liabilities under non-bank borrowings as at December 31st 2019* Co-financing institution / Amount Currency Outstanding balance Project Provincial Fund for Environmental Protection and Water Management in Szczecin 90,000 PLN 33,704 Exhaust gas treatment unit and upgrade of EC II CHP plant

National Fund for Environmental Protection and Water Management in 90,000 PLN 54,635 Szczecin Upgrade of ammonia synthesis process

Grupa Azoty Zakłady Chemiczne Police S.A. Page 46 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

* In nominal terms.

10-year PLN 90,000 thousand loan from the Provincial Fund for Environmental Protection and Water Management in Szczecin, to finance the ‘Exhaust gas treatment unit and upgrade of the EC II CHP plant at Zakłady Chemiczne Police S.A.’ project. The loan was disbursed in full. The loan repayment date is December 31st 2022. 10-year PLN 90,000 thousand loan from the National Fund for Environmental Protection and Water Management in Warsaw, to finance the ‘Upgrade of the ammonia synthesis process at Zakłady Chemiczne Police S.A.’ project. The loan was disbursed in full. The loan agreement expires on December 20th 2023.

5.7. Loans advanced Loans advanced to the Group’s related entities No loans were advanced within the Police Group in 2019 and up to the date of this 2019 report. As at December 31st 2019, the subsidiary Supra Agrochemia Sp. z o.o. owed the Company PLN 14,600 thousand in total under three loans. The loans are to be repaid by December 31st 2020. Table 32. Loans advanced to subsidiaries as at December 31st 2019 Agreement Borrower’s name Currency Amount Repayment date date

Supra Agrochemia Sp. z o.o. Mar 21 2014 PLN 3,600 Dec 31 2020

Supra Agrochemia Sp. z o.o. Dec 31 2014 PLN 10,000 Dec 31 2020

Supra Agrochemia Sp. z o.o. Jun 28 2018 PLN 1,000 Dec 31 2020

5.8. Sureties and guarantees received and issued In 2019, the Grupa Azoty Police Group did not issue or amend any guarantees with a significant aggregate value. Guarantees Table 33. Guarantees provided by the Parent as at December 31st 2019 Amount Amount Type/ Curren Beneficiary Details Date (currency (PLN ’0 cy Issuer ) 00) Guarantor’s obligation as PKO BP S.A. STATE TREASURY general security in customs PLN Mar 20 2018 NA 1,000 transactions (...) Payment guarantee for Nov 15 2017 PKO BP S.A. PSE S.A. electricity transmission PLN NA 1,300 (annex) contract STATE TREASURY (GIOŚ – Chief Performance bond for iron PKO BP S.A. Environmental sulfate (waste) supply PLN Apr 19 2018 NA 1,702 Protection contract Inspector) Performance bond in open PKO BP S.A. PGE S.A. PLN Feb 21 2019 NA 94 tender contract Guarantor’s obligation as general security in customs PKO BP S.A. STATE TREASURY PLN May 13 2019 NA 250 transactions (...) temporary storage STATE TREASURY Performance bond for iron PKO BP S.A. (GIOŚ – Chief sulfate (waste) supply PLN Jul 29 2019 NA 1,182 Environmental contract

Grupa Azoty Zakłady Chemiczne Police S.A. Page 47 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Protection Inspector) STATE TREASURY (GIOŚ – Chief Performance bond for iron PKO BP S.A. Environmental sulfate (waste) supply PLN Jul 29 2019 NA 1,697 Protection contract Inspector) STATE TREASURY (GIOŚ – Chief Performance bond for iron PKO BP S.A. Environmental sulfate (waste) supply PLN Nov 25 2019 NA 3,444 Protection contract Inspector) 10,669

As at December 31st 2019, there were no guarantees issued to the subsidiaries. As at the reporting date, the total amount of guarantees provided to the Parent was PLN 16,557 thousand. As at December 31st 2019, the subsidiaries Grupa Azoty Police Serwis Sp. z o.o. and Grupa Azoty Polyolefins S.A. were the Group companies to have received guarantees, for a total amount of PLN 6,998 thousand and EUR 89,281 thousand (PLN 380,203 thousand), respectively.

Table 34. Sureties provided by the Parent as at December 31st 2019 Amount Amount Type/ Currenc Beneficiary Details Date (curren (PLN ’000 y Issuer cy) ) Surety for Revolving credit syndicated credit Grupa Azoty S.A. facility PLN Jun 29 2018 NA 1,200,000 facility agreement Surety for PKO BP Overdraft facility credit facility Grupa Azoty S.A. PLN Jun 29 2018 NA 124,000 agreement (overdraft) Multi-purpose Surety for PKO BP Grupa Azoty S.A. credit facility PLN Jun 29 2018 NA 96,000 credit facility (MPCF) agreement Guarantee of Credit facility repayment of EIB Grupa Azoty S.A. PLN May 28 2015 NA 220,000 agreement credit facility Guarantee of Credit facility repayment of EBRD Grupa Azoty S.A. PLN May 28 2015 NA 60,000 agreement credit facility Guarantee of Credit facility repayment of EIB Grupa Azoty S.A. EUR Jan 25 2018 58,000 246,993 agreement credit facility Guarantee of Credit facility repayment of EBRD Grupa Azoty S.A. PLN Jul 26 2018 NA 200,000 agreement credit facility 2,146,93 3

In the reporting period, the Parent provided a surety of EUR 11,660 thousand to Grupa Azoty Polyolefins S.A. to secure payments under the contract with Hyundai Engineering Co. Ltd. to construct a propylene unit. The surety, in the form of a Letter of Guarantee, was granted on August 1st 2019 and expired on December 30th 2019. As at December 31st 2019, none of the subsidiaries provided any sureties.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 48 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

5.9. Material off-balance-sheet items The Company requested the issuance of bank guarantees to secure its potential liabilities under contracts with suppliers. Guarantees issued at the instruction of the Company as security for liabilities recognised in the statement of financial position or liabilities with respect to which the likelihood of cash outflows to settle the liability is very low are not presented as contingent liabilities. As at December 31st 2019, there was only one valid blank promissory note at the Company, issued as security for the PLN 90,000 thousand loan advanced by the National Fund for Environmental Protection and Water Management of Warsaw as co-financing for the investment project ‘Upgrade of the ammonia synthesis process at Zakłady Chemiczne Police S.A.’ Blank promissory notes issued by the Company and guarantees issued by banks at the instruction of the Company as security for liabilities recognised in the statement of financial position or liabilities with respect to which the likelihood of cash outflows to settle the liability is very low are not presented as contingent liabilities.

5.10. Financial instruments The Company manages financial risk in line with the ‘Financial (Currency and Interest Rate) Risk Management Policy’, adopted in 2015. In accordance with the Policy, the objective of the Grupa Azoty Group’s currency risk management is to reduce the impact of adverse exchange rate movements on the Group’s cash flows to a level acceptable by the Group, determined in accordance with the VaR methodology. In 2019, the Company hedged a portion of its planned net long foreign exchange position denominated in the euro using forward contracts. In order to mitigate currency risk, the Company also relied on natural hedging, consisting in balancing income and expenses denominated in a foreign currency to minimise the effect of exchange rate fluctuations on its financial performance. In 2019, the Company did not use any financial instruments to hedge against interest rate risk. Credit risk management policy The credit risk management policy applies to and is applied by all of the Company’s divisions and organisational units which enter into commercial or financial transactions. The policy, which lays down the rules for managing risk arising from trade credit granted by the Company, comprises:  risk identification and assessment,  definition of risk management strategy,  selecting risk management measures,  implementing the adopted strategy,  monitoring and evaluating the effects of the measures taken. Receivables insurance agreements In 2019, the insurance of trade receivables arising from sales of fertilizers, urea, titanium white and chemicals was continued. The insurance policies with Atradius Credito Caucion S.A. de Sequros y Reaseguros S.A. Polish Branch (the insurer), signed in January 2019 for the second insurance period, i.e. from January 1st to December 31st 2019, were a continuation of the policies effective in the first period, i.e. in 2018. The policies cover both domestic and export trade receivables denominated in three currencies (PLN, EUR and USD) for a period of 24 months, with two annual settlement periods.

5.11. Expected financial condition Despite strong exposure to developments in the market environment, the Parent as well as the Group are fully solvent, with good credit standing. This means they are able to pay their liabilities as they fall due and to generate and hold free operating cash flows to further support timely payment of such liabilities. In 2019, all liabilities under borrowings were paid when due, and there is no risk of failure to continue servicing the debt. To secure liquidity, the Parent uses external sources of financing. As a key Company of the Grupa Azoty Group, it is party to umbrella facility agreements to secure funding for day-to-day operations, and to New Financing Agreements, which include long-term agreements for the financing of the Strategy and Development Plan. The Parent and its subsidiaries are participants of a physical cash pooling agreement in PLN and EUR whereby some companies’ deficits are financed with surpluses generated by other companies. Thus, even in the event of a short-term

Grupa Azoty Zakłady Chemiczne Police S.A. Page 49 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) deterioration of macroeconomic conditions, the risk of losing liquidity remains low. The Company is able to defer payment of its liabilities as the Company and its Key Subsidiaries are parties to the Payment Services Agreement, a mechanism supporting liquidity management, with Banco Santander S.A. Prices of key feedstocks and raw materials and generation of positive margins on the main products sold both on the domestic market and abroad will be the key factors determining the Parent’s development in 2020, including growth of its financial resources and assets. In addition, future financial performance will also be influenced by exchange rates (USD, EUR) as well as market conditions in agriculture and the industries which are end customers for the Company’s products. In late 2019, the first cases of the coronavirus disease were reported in China. However, the actual magnitude of future effects of the COVID-19 outbreak and its impact on the Parent’s business is currently unknown and cannot be estimated, as it depends on fast-changing factors that are beyond the Company’s control. Therefore, it is not yet possible to reliably determine the impact of the COVID-19 pandemic on the Company’s financial condition. In the near term, however, it cannot be ruled out that the risk of a significant adverse impact of COVID-19 on the Company’s and its Group’s business may escalate.

6. Risk, threats and growth prospects Given the Company’s position within the Group, factors of critical importance to the Group’s growth coincide with those that are material to development of the Parent. Therefore, the Group’s risks, threats and growth prospects are viewed mainly in the context of the Parent’s own business growth prospects.

6.1. Significant risk factors and threats 6.1.1. Strategic equity investments and growth initiatives Risks associated with the planning and execution of strategic projects As drivers of long-term growth, strategic investment projects are among Grupa Azoty’s top priorities. They are mainly focused on developing new products, enhancing the efficiency of existing units, and reducing production costs of key products. In addition, the applicable legal regulations (including the Industrial Emissions Directive) are monitored on an ongoing basis to bring the existing units in line with any new requirements when and as needed. The planning and execution of strategic projects entail multiple risks as well as opportunities. The main risk is associated with failure to complete investment projects according to initial plans and failure to achieve the expected results. The project preparation phase involves the risk of failure to accurately assess the changing environment and to select an appropriate technology. If a project is not properly prepared or unexpected circumstances arise, the Company also risks incurring additional capital expenditure during its execution. Key projects also carry the risk of selecting an unsuitable entity to be responsible for project execution. Risk of budget overruns may arise as a result of more stringent requirements applicable to contractors/subcontractors as this may involve higher contract costs and may result in a lower number of potential contractors holding the necessary licences. On the other hand, more stringent requirements may translate into improved OHS standards and higher quality of services provided. The success of strategic projects is contingent on many external and internal factors. The main external factors affecting the Company’s growth opportunities and growth rate include macroeconomic factors, market situation, economic environment, and the activities of main competitors. They could adversely affect the Company’s and the Grupa Azoty Group’s ability to develop its business as planned and to deliver its strategic objectives. They, however, remain largely beyond the Company’s control. Possible amendments to EU directives, amendments to OHS, fire protection and building law regulations, or regulations issued by the Polish Office of Technical Inspection (UDT) and the Polish Office of Transport Inspection (TDT), involve the risk of underestimating project budgets and being subject to more stringent requirements for the execution and acceptance of works, which carries a

Grupa Azoty Zakłady Chemiczne Police S.A. Page 50 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) risk of extending the deadline for project completion. At the same time, such amendments create opportunities for improving OHS conditions and the quality of projects. Major internal factors and efforts relevant to the Company’s and the Grupa Azoty Group’s growth include the technical condition of production units and organisational preparedness to deliver the investment programme. In order to minimise the risks to the execution of strategic projects at the Company and the Grupa Azoty Group, internal procedures have been put in place to define and govern the preparation and execution of investment projects. Specific controls are required for contractors, their credentials and experience, as well as proper and timely performance of work. The internal control system helps to mitigate any mismanagement risk and find opportunities to optimise spending. The planning phase is based on reliable market information sourced from reports of external market research firms, or opinions of technology, economic and market consultants and advisors. Oversight has been introduced over strategic projects, which involves a review of projects’ key assumptions (business effects, budgets, KPIs, schedules, division of responsibilities). Regular projects status updates are provided, and project managers are required to prepare monthly and quarterly progress reports. Such reports also cover the risks and threats related to specific projects. A uniform risk assessment methodology for the planning and execution of strategic projects was introduced across the Grupa Azoty Group. The risk assessment procedure involves two aspects of key importance for the implementation of strategic projects: their budgets and completion deadlines. Risk indicators for strategic projects are monitored on a regular basis and reported quarterly. Six strategic projects were monitored in 2019. 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. 6.1.2. Laws, regulations and compliance Risk of implementation/tightening of EU or local regulations which would restrict the use of the Company’s products New Fertilizer Regulation There is a risk that the Company may incur costs arising from introduction of new requirements with respect to the content of heavy metals (such as cadmium or nickel) in its products, as a new fertilizer regulation is to apply as of July 16th 2022. More stringent regulations concerning the heavy metal content in fertilizers may force the Company to find new supply sources for raw materials, including phosphate rock and magnesites, which in turn may drive up production costs. The effectiveness of feedstock structure optimised in terms of the content of contaminants depends on the availability of the required feedstock for day-to-day manufacturing. Thus, an appropriate timing of deliveries as well as storage and production logistics are necessary to achieve the targets. There is also a risk that prices of the feedstocks meeting the requirements will rise. Therefore, the Company is engaged in developing technologies to remove heavy metals from available raw materials (e.g. cadmium from phosphoric acid and phosphate rock, and nickel from magnesites), as no such technologies have been developed and commercialised to date. The Company also reviews its product portfolio in the context of the legislative requirements, taking into account products’ market attractiveness and production costs. Changes in fertilizer manufacturing processes that meet the requirements may lower the competitiveness of products on certain markets as their production costs may increase. Like the other Polish manufacturers of phosphate fertilizers and most European fertilizer producers, the Grupa Azoty Group proposed that a cadmium (Cd) content limit in fertilizers be set at 80 mg per kilogram of P2O5, which would not increase the cadmium content in soil, but could help the industry avoid significant market consequences. The fertilizer regulation, published in the Official Journal of the European Union on June 25th 2019, which, pursuant to Article 53 thereof, takes effect on the 20th day after its publication and starts to apply as from July 16th 2022, sets a cadmium content limit in fertilizers at 60 mg per kilogram of P2O5. Together with the limit, requirements were specified with respect to a mandatory review to be performed by the European Commission four years after the cadmium limit effective date (3+4 = 7 years). The review is to provide an assessment of the market after the regulation is implemented. Another aspect accompanying the proposed cadmium content limit at 60 mg Cd/P2O5 is the possibility that fertilizers with less than 20 mg Cd/P2O5 receive the so- called ‘green label’. Similarly, a national derogation was provided, allowing member states to maintain stricter limits on cadmium content in fertilizers (less than 60 mg Cd/P2O5). The Company and the Grupa Azoty Group are involved in consultations held at the Ministry of Entrepreneurship and Technology and between trade associations (Fertilizers Europe, the Polish Chamber of Chemical Industry), on implementing the regulation. The Grupa Azoty Group has its

Grupa Azoty Zakłady Chemiczne Police S.A. Page 51 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) representatives in the working team appointed by the European Commission to develop a fertilizer label guide in accordance with the requirements of the regulation. The team began its work on July 2nd 2019, and the guide is planned to be released in the first half of 2020. The new fertilizer regulation significantly changes the manner of assessing the conformity of CE-marked fertilising products (conformity assessment modules). Some of the Company’s and the Grupa Azoty Group’s fertilizers will be subject to third party (notified body) assessment or implementation of quality systems, which will increase production costs. The new fertilising product regulation repealed Regulation (EC) No 2003/2003 of the European Parliament and of the Council relating to fertilisers. It will also trigger the need to amend Polish fertilizer legislation, including the Fertilizers and Fertilization Act. Implementation of NEC Directive There is a risk that the Company may incur costs arising from the requirement to reduce ammonia emissions from urea fertilizers following the implementation into Polish legislation of Directive (EU) 2016/2284 of the European Parliament and of the Council of 14 December 2016 on the reduction of national emissions of certain atmospheric pollutants. The NEC Directive aims to reduce emissions of nitrogen oxides (NOx), volatile organic compounds, sulphur dioxide (SO2), ammonia (NH3) and fine particulate matter (PM2.5), that is pollutants which significantly deteriorate air quality and give rise to negative impacts on and risks to human health and the environment. National commitments to reduce ammonia (NH3) emissions by 1% each year from 2020 to 2029 and by 17% each year from 2030 onwards will entail reducing ammonia emissions from the application of mineral fertilizers, including in particular urea. The implementation of the NEC Directive will lead to changes in fertilizing practices, such as partial reduction or abandonment of the use of urea, or development of new technologies for manufacturing urea-based fertilizers (e.g. slow-release fertilizers, fertilizers with inhibitors reducing emissions caused by nitrogen escaping from fertilizers). The NEC Directive has not yet been transposed into Polish law; at present, work and consultations with industries and sectors are under way at the Ministry of Agriculture. However, it was agreed that the regulation (the NEC Directive) will come into force in Poland on April 1st 2021. The regulation will exclude the possibility of using urea without the urease inhibitor in Poland. Under the NEC Directive, the Company will be required to use an urease inhibitor in the production of agricultural urea, which increases production costs and changes the urea production and logistics pattern. Recommendations on the course of action to be taken by the Company with respect to the restrictions on the application of agricultural urea imposed by the NEC Directive concerning reduction of ammonia emissions from urea are as follows:  Production and field studies on the use of agricultural urea with a selected urease inhibitor, together with an assessment of the effect of the costs of such solution on the margin from urea sales in this segment.  Analysis of investment needs related to the production and transport of technical and automotive grade urea (uncoated and NOXy/ PULNOx solutions).  Launch of production and supply of agricultural urea with an urease inhibitor at the Company.  Analysis of scenarios envisaging the sale of agricultural urea in the technical and automotive grade segments in the long term, i.e. after 2030. Planned prohibition of sale in France of foodstuffs containing titanium dioxide On April 17th 2019, a ban was introduced in France on the sale of foodstuffs containing the E 171 (titanium dioxide - TiO2) food colouring following an analysis of the results of the tests carried out by the French National Institute for Agricultural Research (INRA). The ban took effect on January 1st 2020 and is to remain in force for a year, which will give the European Commission the time to carry out analyses to decide whether to extend the ban to cover all EU members, or modify or lift it.

Classification of TiO2 as a substance that may cause cancer (category 2, by inhalation) In February 2020, Commission Delegated Regulation (EU) 2020/217 was published, concerning, among other things, the classification of TiO2 as a substance that may cause cancer by inhalation (category 2). This classification is not related to the chemical properties of titanium dioxide, but to the form in which it is found – very fine particles inhaled when dust concentration is extremely high. The Regulation will take effect on October 1st 2021, giving entities along the entire supply chain the time to ensure conformity of package labelling and processes with the new regulations. The Company monitors the risk related to the classification on an ongoing basis and takes extensive measures

Grupa Azoty Zakłady Chemiczne Police S.A. Page 52 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) relating to information, occupational health and safety, environmental protection and labelling of products in order to meet the requirements imposed by the Regulation. 6.1.3. Supply of key raw materials and feedstocks Risk related to availability of coal and continuity of supply In the course of its operations, the Company may be exposed to a potential risk of restricted access to coal in the required quantity and of the required grade and quality for its production processes, or of a significant coal price increase. One of the key consequences of the materialisation of this risk would be a reduction in fuel stocks below safe limits and the related disruption of production processes. The Company has a limited control of a possible disruption of coal supplies due to disruptions in rail transport (such as failures or strikes at rail operators), as well as disruptions of the operation of mines (e.g. strikes or geological issues). Another significant factor is the possibility of a steep increase in coal prices. The Company has in place control mechanisms to mitigate this risk. It prepares reports on the market on an ongoing basis and draws up monthly, quarterly and annual forecasts. Procurement committees have been established and operate at the corporate level within the Company. Should the need arise, the Company may use alternative means of transport for purchased coal (e.g. by land or by water). It may also sign an alternative contract with a new coal supplier. The coal procurement risk management strategy focuses on measures designed to mitigate the risk by entering into long-term coal supply contracts in order to reduce the risk of price rises. Procurement from suppliers operating in Poland or the neighbouring countries reduces the risk of price increases and eliminates the risk of supply disruptions (in the case of supplies from remote countries, transport risk increases and transport costs are substantially higher). Implementation by the Grupa Azoty Group of a diversified supply strategy and the advantage of the contracting potential (joint procurement of coal for all Grupa Azoty Group companies) reduce the risk of dependence on a single supplier and provide an opportunity to negotiate more favourable terms of forward contracts. In 2019, the Company experienced no limitations in heat consumption due to lack of coal, and the safe stocks of coal were at the required level. 6.1.4. Production Risk of major industrial accidents or technical failures resulting in disruption of operations and stoppage of key production units Given the nature of its business, the Company’s priority is to observe the most stringent safety standards to mitigate the risk of industrial accidents. The identified risks that may be key to the Company’s ability to pursue its business objectives are monitored on an ongoing basis. The risk of a potential failure may emerge from: events caused by an improperly conducted production process, faulty technical maintenance, technical condition of production units or incorrect methods of assessing the technical condition (technical condition assessment which does not comprehensively addresses specific conditions of manning and operating technical facilities). The risk may also be posed by fortuitous events (hidden defects in materials or technology). On the other hand, an opportunity is provided by broadening the range of diagnostic methods and non-destructive testing, as well as by the introduction of additional measuring tools. The Company is classified as an establishment with a high risk of a major industrial accident (upper- tier establishment — UTE). The Company has developed and introduced mandatory programmes to prevent such accidents, and regularly monitors and implements legal requirements relating to safety, including the requirements of the Seveso III Directive transposed into Polish legislation. The Company has in place technical and organisational measures to prevent industrial accidents and contain their consequences. The well-trained Company Fire Brigade, 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.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 53 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Control mechanisms are implemented and used in the form of internal procedures, service contracts, monitoring systems, and protection of devices and units against exceeding the permissible parameter values. Such organisational and technical measures allow the Company to maintain high safety standards and consistently reduce its environmental footprint. The Company’s efforts to improve working conditions, Company-wide work safety campaigns and the free disease prevention programme offered to employees have been recognised by external institutions − for instance, in 2018 the Company once again received the Gold Card Leader on Safety at Work Award (2019–2020). The Company’s units are equipped with a range of process interlocks and interlocks supervised by the Technical Inspection Office that prevent accidents and ensure operational and equipment safety in the event of disruption of operations. TPL (Total Preventive Maintenance) programmes and modern Preventive Maintenance programmes, supported by the CMMS system and plant maintenance management, significantly enhance the technical condition and reliability of production units, thereby minimising the risk of accidents. Our strategy of industrial accident and technical failure risk management is primarily focused on mitigating the risk of any critical situation occurring, but also provides for the apportionment of its consequences between insurers should any risk materialise. In line with the applied internal procedure, each failure is followed by activities specified in reports prepared by emergency committees or in corrective/preventive action plans. During the scheduled maintenance shutdown at the Nitro Business Unit in Q2 2019, discontinuities in welding joints in boilers at the Synthesis Gas Unit were detected, resulting in prolonged shutdowns of the ammonia and urea production units. Inspections related to prevention of major industrial accidents took place in June 2019. No violations or breaches were identified by the Szczecin Provincial Inspectorate for Environmental Protection. As the irregularities identified by the Szczecin Provincial Headquarters of the National Fire Service and the Police County Headquarters of the National Fire Service were promptly rectified, no administrative decisions were issued. In Q3 2019, one major industrial accident (as defined in the Environmental Protection Law) was reported. As the inspection carried out by the Szczecin Provincial Inspectorate for Environmental Protection after that accident did not reveal any violations or breaches attributable to the Company, no post-inspection rulings were issued. Risk associated with the requirement to ensure compliance of the production processes with new legal requirements Any change in environmental regulations will require unit operators to adapt their units to the new legal requirements and incur related costs. Possible threats also include: the introduction of new regulatory requirements that are not correlated with investment plans and financing capacities, the risk of a failure to adapt units to the announced BAT conclusions, a failure to meet the permissible emission limits or the risk of legal changes resulting in an increase in environmental fees. On September 16th 2019, the Minister of the Environment’s Regulation on video monitoring of waste storage and landfill sites was published. The Company was actively involved in consultations on the draft of the regulation and amendments to the Waste Act. The proposed exclusion of phosphogypsum, ash and slag from monitoring was accepted. As regards the monitoring of the iron sulfate (II) landfill site, the obligation to comply with the Waste Act requirements has been maintained, which means that the landfill site must be monitored. Risk related to prices and availability of natural gas Gas is one of the key feedstocks used by the Company. Risk related to gas availability may result from poorer-than-expected access to gas or disruptions in day-to-day supply of gas in adequate volumes and of the quality required for production processes. Material drivers of the risk of a gas price increase are temporary shortages of gas in Europe, higher prices of other energy commodities, weather conditions, geopolitical and economic factors, as well as failures in the upstream and industrial systems. Other threats include:  the risk that an increase in the price of gas, which is a key item of production cost, affects the Company’s ability to offer competitive products and impacts its financial performance,  the risk that dependence on a supplier undermines the Company’s position in negotiating gas purchases,

Grupa Azoty Zakłady Chemiczne Police S.A. Page 54 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

 lower revenue due to lack of access to a natural gas supply stream,  a force majeure event causing an interruption in the natural gas supply stream,  instability of production plans,  unscheduled emergency and maintenance shutdowns,  significantly reduced diversification of supply sources. In line with its risk management strategy, the Company has put in place controls to mitigate/avoid the risks. Natural gas is purchased under the Framework Agreement and the Individual Contract. The Framework Agreement sets out the general rules for the entry into, performance, amendment and termination of contracts. The Individual Contract specifies in detail the commercial terms of supplies. Joint settlements at the Group level also mitigate the risk of incurring costs related to failure to receive the minimum contracted gas volumes. Risk related to continuity of production processes relying on ammonia The key risks that may disturb the continuity of ammonia production and its availability are of both external and internal nature. The external factors, which are beyond the Company’s control but affect production continuity, include the market environment, price fluctuations on the local and global markets, economic conditions, political factors influencing access to transmission pipelines and thus supply continuity for natural gas (the key feedstock), as well as the level of demand, largely dependent on the economic environment. Further potential risk factors are higher prices of gas, which is a significant cost item, and possible force majeure events, which might limit or interrupt gas supplies. If the ammonia unit operates at a reduced capacity, failure to precisely determine the ammonia requirements may result in a failure to receive the contracted volumes. The risks are offset by opportunities, such as lower gas consumption per tonne of ammonia, which translates into reduced gas consumption at the Company. The internal factors stem from technological constraints, such as the type and design of equipment, its complexity, nature of emergency repairs, availability of the specialist maintenance services and spare parts. The Company has undertaken a number of initiatives to ensure reliable operation of the production units and maximum availability of machinery and equipment, including: • implementation of a Total Preventive Maintenance programme and Preventive Maintenance principles, supported by the CMMS IT system, including plant maintenance management, which significantly enhances the technical condition and reliability of production units, thereby minimising the risk of accidents; • upgrade of the ammonia unit, chiefly to reduce its energy-intensity, which will reduce costs of key feedstocks and utilities; • optimisation of the ammonia production process through efficient management of the production stream with appropriate selection of operating parameters for machinery and equipment, resulting in maximum capacity utilisation and achievement of the target production volumes. With the supply arrangements at the Grupa Azoty Group level, designed to optimise ammonia supplies within Grupa Azoty S.A., the Group has a greater flexibility in relations with external suppliers and better ability to respond to unfavourable market trends. In 2019, the maintenance shutdown of the ammonia unit was prolonged due to detection of discontinuities in welding joints in boilers following tests performed by the Central Technical Inspection Laboratory. The discontinuities in welding joints were caused by defects that occurred during the making of the boilers in 1978. Thermal treatment produced sub-plating and reheat cracks which, after many years of the boilers’ operation, were revealed by the state-of-the-art ultrasonic methods used by the Office of Technical Inspection. Based on the repairer’s approval of the dedicated technology for repairing the welding joints in line with the technology developed by the AGH University of Science and Technology, the boilers were repaired and ammonia production was resumed. 6.1.5. Sales and marketing Risk of higher fertilizers imports The Company’s market position and its competitiveness largely depend on conditions prevailing on the fertilizer market, which need to be closely monitored and require taking legislative as well as

Grupa Azoty Zakłady Chemiczne Police S.A. Page 55 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) lobbying initiatives. Imports of NP and NPK compound fertilizers to Poland (mainly from the East) have been growing in recent years. This situation has not caused any reduction of the Company’s output so far, but it poses a threat to fertilizers’ logistics. There is a risk of further growth of imports and oversupply of products on the market. Access to cheap gas and no obligation to comply with the EU environmental regulations and standards give an additional advantage to fertilizer manufacturers from the East. The Company would benefit from the introduction of legal and customs regulations applicable to imported fertilizers, which would ensure fair market competition. Stricter procedures for admission of imported fertilizers to trading on the market would also be welcome. Development of specialty fertilizer formulations expanding the product range to include products for the most demanding customer groups creates another opportunity for the Company. Measures taken by the Company to strengthen its competitive advantages in the fertilizers segment: • implementation of the Group’s updated distribution strategy, • implementation of projects designed to improve the efficiency of production processes, • strengthening the Group’s market position through acquisitions and placement of new products in the market, • taking active part in the consolidation of the chemical industry, • initiating anti-dumping proceedings, • active participation in the work of Fertilizers Europe, • cooperation with universities and research institutes, • performing laboratory tests to develop coated as well as organic and mineral fertilizers, • supporting agricultural producers by providing them with access to state-of-the-art fertilizing and production solutions, • offering comprehensive agrotechnical consultancy services, • implementing a series of educational programmes devoted to fertilizer application, • conducting regular surveys to gauge farmers’ awareness of fertilizer brands and their purchasing practices. Risk of deteriorated supply-demand balance for fertilizers For years, the Company has been operating in a demanding and changeable competitive environment dependent on business cycles, frequently facing an unfavourable demand-supply relationship, and prices of the fertilizers it manufactures strongly depend on the supply and demand on local and international markets. Some of the Company’s competitors may have access to newer technologies or cheaper raw materials, or – thanks to their more favourable geographical location – may have better access to raw materials and target markets. Some manufacturers from the Company’s immediate environment, including Polish manufacturers, plan to increase their production capacities. Because of these factors, the prices of and demand for the Company’s products fluctuate. The risks related to fertilizer production include the following factors: • demand-supply imbalance caused by lower consumption of products (changeable weather conditions, delayed disbursements of direct payments, market saturation and oversupply of products) and lower volumes of purchases by customers who need to scale down their own output and cope with uncertainties surrounding their ability to sell their own products, • • irregular timing of disbursements of direct payments to farmers, • natural disasters, droughts, floods, or frosts leading to lower purchases of fertilizers. To consolidate its market position, the Company is seeking to increase sales on both the domestic and export markets by trying to reach new, smaller customers, focusing more on strategic markets, and looking for new sales markets, also outside Europe. Measures taken by the Company to strengthen its competitive advantages on the fertilizer market include investments and development projects to develop new fertilizer formulas which could be used in agricultural engineering, and to improve the efficiency and flexibility of production processes. The Company is also diversifying its sales markets and customer base. Risk related to customers’ growing quality and environmental requirements Growing customer expectations and the need to comply with the EU environmental regulations and standards have a bearing on the Company’s business. The uncertainty risk relates to: • tightening of EU laws pertaining to heavy metal content, restricting the use of the Company’s products by customers in the EU countries,

Grupa Azoty Zakłady Chemiczne Police S.A. Page 56 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

• restrictions on the quantity of fertilizers used per hectare, • introduction of restrictions on the quantity of components in products following the amendments to the relevant regulation, • liberalisation of trade in the EU, • meeting fertilizer granulation requirements, • decrease in demand from end customers (the cement industry) for iron sulfate in the form offered by the Company as demand for the product in the granular form grows. The Company monitors changes in all types of legal regulations the tightening of which may lead to the limitation of product sales, and coordinates support and lobbying activities at EU institutions. It also works with other manufacturers in order to develop a strong, common position with regard to proposed restrictions. Examples include cooperation with the AEEP (over the new fertilizer regulation) and other producers (with respect to classification of titanium white as a potential carcinogen). Efforts are taken to support the fertilizer and titanium white application. The Company also partners with research and higher education institutions as well as businesses to develop or purchase technologies for removing impurities from phosphoric acid. For years, the Company has been engaged in applied science projects, which result in new or improved products. 6.1.6. Capital and financial risk management

Risk related to prices of CO2 emission allowances

Any regulations on reducing CO2 emissions, including those making up the EU Energy and Climate Package, may have a material effect on the Group’s business. In particular, as the pool of free CO2 emission allowances is being gradually limited, CO2 emissions exceeding the level permitted by the allowances allocated to Polish plants under the National Allocation Plan entail increased expenditures on their purchase. Consequently, there can be no assurance that CO2 emissions trading prices will not have an adverse impact on the Group’s performance. The fact that the carbon market is now regulated by the European Commission through administrative measures, including introduction of the Market Stability Reserve (MSR) as of 2019 (back-loading and redemption of surplus allowances), has made the market all the more unpredictable. The classification of emission allowances as financial instruments in accordance with the MIFID II Directive, resulting in higher prices and market volatility, makes it more difficult to optimally manage such price risk. The need to purchase emission allowances for high market prices may have an adverse effect on the Group’s operations, financial condition or performance. The risk of a negative effect of CO2 trading prices on the Company’s results is reduced through continuous monitoring of the emission allowances market and purchase of emission allowances when prices are favourable. The Grupa Azoty Group has appointed the EU ETS Management Committee, including representatives of all key Group companies. Its main role is to supervise a joint model for managing CO2 emission allowances at the Group companies, in particular the CO2 Emissions Trading Strategy and, subsequently, the implementation of the Emissions Trading Strategy binding on all Group companies. In the first quarter of 2020, the global macroeconomic effects of the coronavirus pandemic declared by the WHO are difficult to estimate. A sharp decline in the prices of CO2 emission allowances (EUA) should in the medium term reduce the Company’s costs associated with its participation in the EU ETS scheme. Currency risk The Company is exposed to currency risk resulting from its net exposure to the euro and the US dollar related to the foreign currency balance of its sale and procurement transactions, trade receivables and payables, as well as receivables and liabilities from financing and investing activities. The Company is also exposed to the risk of temporary strong exchange rate volatility, including the effect of EUR/USD exchange rate development on the EUR/PLN and USD/PLN exchange rates. Strong exchange rate fluctuations may affect the Company’s business, financial position and performance. The Company manages financial risk in line with the ‘Financial (Currency and Interest Rate) Risk Management Policy’, adopted in 2015. In accordance with the Policy, the objective of the Grupa Azoty Group’s currency risk management is to reduce the impact of adverse exchange rate movements on the Group’s cash flows to a level acceptable by the Group, determined in accordance with the VaR methodology. The Group hedges its currency exposure through natural hedging − by balancing revenue and expenses in the same currency arising from the purchase of key raw materials with sales of products for export.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 57 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Additionally, a surplus (long position) in the euro is used to cover a deficit (short position) in the US dollar. To this end, the Company enters into EUR/USD spot transactions. In 2019, the above currency risk management methods were supplemented with forward transactions to hedge some of the planned EUR foreign exchange surplus. The increase in market volatility seen at the end of Q1 2020 and projected for the second quarter of the year, coupled with a flight of capital to safe havens, weakens the złoty against convertible currencies, which should also translate into higher export revenues and increase in the PLN- denominated cost of imported goods.

6.2. Grupa Azoty Group’s significant external and internal growth factors The strongest drivers of the Company’s situation are those related to market prices of the Company’s products and purchase prices of raw materials and feedstocks with the greatest effect on production costs, including mainly natural gas, phosphate rock, and potassium chloride. The relationship between market prices of products and prices of the key raw materials and feedstocks has a bearing on the Company’s competitive position and profitability. Important external drivers of demand for fertilizers are the macroeconomic climate in agricultural and farmers’ incomes. The situation in agriculture is largely determined by the relationship between prices of agricultural produce and prices of means of agricultural production. The Company’s results also depend on economic conditions prevailing in the other sectors in which the main buyers of the Company’s products operate and on the markets where those buyers sell their products, as well as on the overall economic situation. Global economic conditions are affected by, among others, geopolitical tensions and international trade conflicts. Due to the coronavirus pandemics declared in the first quarter of 2020, the 2020 GDP growth rates (globally and in individual markets) may be lower than forecast at the beginning of the year. However, analysts indicate that the current projections are uncertain as it is difficult to predict the extent of the epidemic. Interest rates in Poland In 2019, interest rates in Poland did not change. In the eurozone, the ECB remains under the pressure of poor macroeconomic data and faint prospects for improvement in the medium term. This will periodically reinforce market expectations of continued easing of the monetary policy. As a result, interest rates in the eurozone will remain negative until the end of the year, with a slight cut possible in 2020. Given the decelerating GDP growth in the eurozone and the modest inflation increase, the European Central Bank will continue its quantitative easing programme and a policy of negative interest rates. In the first quarter of 2020, the main central banks announced and implemented non-standard monetary policy instruments to mitigate the global effects of the coronavirus pandemic. The programme was joined by the National Bank of Poland, which at its extraordinary meeting in March announced a 0.5% cut of the reference rate. This move will benefit the Company this year as it reduces its cost of money with respect to the currencies it uses to finance its operations (PLN and EUR). It will create good conditions for debt servicing, also if the Company decides to increase the debt to finance its investing activities. Given the interest rate trends described above, as at the date of this Report the risk of the Company’s financial situation or operating performance deteriorating due to higher debt service costs can be considered low. Regulatory area  The Ministry of the Environment continued the work on implementing into national legislation Directive (EU) 2016/2284 of the European Parliament and of the Council of 14 December 2016 on the reduction of national emissions of certain atmospheric pollutants, amending Directive 2003/35/EC and repealing Directive 2001/81/EC (“NEC Directive”). In April 2019, the Council of Ministers passed a resolution approving the National Air Emission Reduction Programme, and in August 2019 the Polish Code of Good Agricultural Practice for Reducing Ammonia Emissions was published in the performance of the obligations under the NEC Directive.  On June 12th 2019, Directive (EU) 2019/904 of the European Parliament and of the Council of 5 June 2019 on the reduction of the impact of certain products on the environment was published. The new law sets the targets for the individual EU countries relating to the packaging

Grupa Azoty Zakłady Chemiczne Police S.A. Page 58 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

and single-use plastic products industry. The Directive aims to reduce the use of specific types of single-use plastic products taking into account customers’ needs and behaviour as well as companies’ capabilities in this respect. The Directive must undergo the process of implementation in individual countries.  June 29th 2019 saw the entry into force of the Act of June 13th 2019 amending the Act Amending the Act on Excise Duty and Certain Other Acts, the Energy Efficiency Act and the Act on Biocomponents and Liquid Biofuels. The main reason for the amendment was to ensure that households, micro and small enterprises, hospitals, public sector entities, including local governments and state-owned unincorporated organisational units would pay throughout 2019 the same price for electricity as they did in June 2018. Medium-sized and large enterprises that purchase electricity on the market were entitled to apply for reimbursement of their costs from the Price Difference Reimbursement Fund, based on the rules of de minimis aid. Those enterprises’ applications started to be accepted after the end of the third quarter of 2019.  July 15th 2019 saw the entry into force of the New Fertilizers Regulation (Regulation (EU) 2019/1009 of the European Parliament and of the Council of 5 June 2019 laying down rules on the making available on the market of EU fertilising products and amending Regulations (EC) No 1069/2009 and (EC) No 1107/2009 and repealing Regulation (EC) No 2003/2003). The Regulation will become fully binding in July 2022 after a three-year vacatio legis period during which the European Commission will issue a number of delegated acts supplementing the provisions of the Regulation. In Poland, work is under way to align national laws, e.g. the Polish Fertilizers and Fertilization Act, with the Regulation.  On July 29th 2019, the Act Amending the Waste Act and Certain Other Acts was published in the Official Journal of Laws of the Republic of Poland and entered into force on August 18th 2019. The Act further clarifies the provisions relating to the operation of a database on products and packaging and on waste management (BDO) as an electronic system.  On August 14th 2019, the Act on Compensation for Indirect Emission Costs was published in the Journal of Laws and entered into force on August 29th 2019. The Act concerns allocating a portion of funds obtained by Member States in connection with the sale of CO2 emission allowances as compensation for the energy-intensive industry.  • On August 22nd 2019, the Act amending the Act on Maintenance of Cleanliness and Order in Municipalities and Certain Other Acts was published in the Journal of Laws and entered into force on September 6th 2019. The Act introduced a number of amendments to the Waste Act, including the introduction of the category of non-combustible waste, the possibility of issuing optional decrees concerning the loss of the waste status, or further clarification regarding the maintenance of video surveillance systems.  On November 8th 2019, Commission Delegated Regulation (EU) 2019/1868 of 28 August 2019 amending Regulation (EU) No 1031/2010 to align the auctioning of allowances with the EU ETS rules for the period 2021 to 2030 and with the classification of allowances as financial instruments pursuant to Directive 2014/65/EU of the European Parliament and of the Council was published in the Official Journal of the European Union. The legislation governing the auctions of emission allowances needed to be changed to take account of new rules for phase 4 of the EU ETS (2021– 2030) agreed as part of the 2018 revision of the ETS Directive. The changes concern in particular the use of a common auction platform to monetise the allowances dedicated to the Innovation and Modernisation Fund. Technical changes were also necessary to take account of the fact that as of the beginning of 2018 emission allowances are classified as financial instruments under the European financial legislation. In addition, while the auction process is widely seen as working well and the overall architecture of the auction process remains unchanged, some of the rules were improved and simplified.  On November 28th 2019, the European Commission published an ambitious plan for industries’ transition towards climate neutrality by 2050, prepared by the High-Level Group on Energy- intensive Industries – ‘Masterplan for a Competitive Transformation of EU Energy-intensive Industries Enabling a Climate-neutral, Circular Economy by 2050’. The proposals are intended to provide a framework for supporting transition towards a climate-neutral industry. The Masterplan’s key objectives are: creation of markets for climate-neutral, circular economy products, developing climate-neutral solutions and financing their uptake, resources and deployment. The Masterplan includes activities that can provide the right signals to the markets to attract new investments and help businesses to implement cost-effective climate-neutral solutions. It also focuses on the need to ensure a just transition and highlights the importance of providing employees with skills that will be useful in the future as well helping communities which are dependent on those industries

Grupa Azoty Zakłady Chemiczne Police S.A. Page 59 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

in managing this transition.  On December 6th 2019, consultations began on the draft (D1) of the reference document for best available techniques (BREF) for common waste gas treatment in the chemical sector (WGC).  On December 11th 2019, the European Commission published a communication setting out a European Green Deal for the European Union and its citizens. It resets the Commission’s commitment to tackling climate and environmental-related challenges that is this generation’s defining task. It is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource (the European Commission systematised the existing visions and supplemented them with new goals). The document stresses that the implementation of the European Green Deal and the achievement of its goals must be conducted in a fair and inclusive way.  On December 12th 2019, the Ministry of State Assets made the draft Act Amending the Energy Law available as part of public consultations. The aim of the proposed amendments is to transpose Directive (EU) 2019/692 of the European Parliament and of the Council of 17 April 2019 amending Directive 2009/73/EC concerning common rules for the internal market in natural gas. The Directive requires Member States to ensure that the rules applicable to gas transmission lines connecting two or more Member States are also applicable to gas transmission lines to and from third countries, i.e. non-EU Member States or member states of the European Free Trade Agreement (EFTA) − signatories of the Agreement on the European Economic Area.  Work is in progress on implementing phase 4 of the ETS. The existing mechanisms, i.e. the solidarity mechanism and the derogation under Article 10c, have been revised. The ETS expert group prepared a document dated November 7th 2019 for discussion by the Commission concerning the update of the EU ETS phase 4 emission indicators – the general guidance and historical heat and fuel emissions. The discussion document refers to the general guidance for Phase 4 benchmarks: Introduction: The ‘reference criteria/benchmarks to be applied for phase 4 (2021– 2030)’ are based on the levels developed for phase 3 (2013–2020). Only updates of benchmark values are required. Trade policy  On August 28th 2019, pursuant to a decision of the Ukrainian Interdepartmental Commission on International Trade proceedings were initiated concerning fertilizer imports to Ukraine irrespective of the country of their origin. The Commission decided to commence two proceedings – one concerning nitrogen fertilizers, and the other – compound fertilizers. As a result of those actions, equal duties may be introduced for all importers or quotas on individual countries exporting goods to Ukraine.  On October 9th 2019, the Implementing Regulation of October 8th 2019 imposing an anti-dumping duty on imports of mixtures of urea and originating in Russia, Trinidad and Tobago and the United States of America was published in the EU Official Journal. The duty was imposed for five years and the anti-dumping duties range between EUR 22.24/tonne and EUR 42.47/tonne, depending on the country and manufacturer.  The United Kingdom left the European Union on January 31st 2020, in accordance with the Brexit deal. The transitional period will last until the end of 2020, with trade continuing on the pre-Brexit rules. Future trade relations between the European Union and the United Kingdom are most likely to be governed by a free trade agreement.  The free trade agreement between the EU and Japan took effect on February 1st 2019 – the negotiation guidelines were adopted in 2012 and the agreement was ratified in late 2018.  On June 28th 2019, negotiations were closed on a trade agreement forming part of an association agreement, with Argentina, Brazil, Paraguay and Uruguay (Mercosur) – negotiation guidelines were adopted in 1999.  On June 30th 2019, the European Union and Vietnam signed a free trade agreement – the negotiation guidelines were adopted in 2007.  Negotiations of European Union’s trade agreements with the following third countries are in progress: Mexico (the provisions of the agreements are now undergoing a legal review), Chile (the provisions of the agreements are being drafted in bilateral negotiations), Australia and New Zealand (the provisions of the agreements are being drafted in bilateral negotiations) and the United States.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 60 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

7. Parent’s equity and other securities and its major shareholders 7.1. Total number and par value of Parent shares, holdings of Parent shares by supervisory and management personnel, and interests of such persons in the Parent’s related entities Number and par value of Parent shares:  60,000,000 Series A shares with a par value of PLN 10 per share,  15,000,000 Series B shares with a par value of PLN 10 per share,  49,175,768 Series C shares with a par value of PLN 10 per share. The total number of Parent shares is 124,175,768 ordinary bearer shares (code PLZCPLC00036). Table 35. Parent shares held by Parent’s management personnel Number of shares / voting rights As at As at As at the date of this Jan 1 2019 Dec 31 2019 Report Wojciech Wardacki, Ph.D. - - - Włodzimierz Zasadzki, Ph.D. - - - Tomasz Panas - - - Anna Tarocińska 1 1 1

As at the end of the reporting period (December 31st 2019) and as at the date of this Report, no members of the Parent’s Supervisory Board held any shares in the Parent. As at the date of this Report, none of the Parent’s supervisory or management personnel held any shares in the Parent’s related parties. Since the date of issue of the previous report, there have been no changes in holdings of Parent shares by the supervisory personnel.

7.2. Treasury shares held by the Parent, Group companies and persons acting on their behalf The Parent holds no treasury shares. The Group companies hold no treasury shares.

7.3. Key information on Parent shares The Company shares were listed on the Warsaw Stock Exchange for the first time on July 14th 2005. The shares (ticker: PCE) are listed on the WSE main market in the continuous trading system and are included in the WIG and sWIG80 indices and the chemical sector index, WIG-Chemia. Share performance The Company stock price started 2019 at PLN 13.70. In the first month of the year, the price stabilised at approximately PLN 14.00. February saw a surge in the stock price, which reached the year’s high of PLN 17.50 on February 21st 2019. After that, the price went into a downward trend to fall in March to the level seen in January 2019. In the second quarter, the stock price ranged between PLN 14.00 and PLN 14.40 and fell to PLN 12.30 at the end of the quarter. The beginning of the third quarter saw the price go up to PLN 15.30, and then fall to the range seen in Q2, i.e. PLN 13.80–PLN 14.30. The first half of the fourth quarter witnessed a steady decline in share price, to PLN 13.50. At the end of the first week of November, the Company stock plunged to PLN 10.70 and the trend continued until the first week of December. The Company stock reached its low on December 4th 2019, when it traded at PLN 10.00. Afterwards, the share price stabilised in the region of PLN 10.20–PLN 10.50. The year-end price was PLN 10.50.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 61 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Figure 14. Share performance and trading volumes in 2019 20,00 0,05%

15,00 0,04% 0,03% 10,00 0,02% 5,00 0,01% 0,00 0,00% 01.19 02.19 03.19 04.19 05.19 06.19 07.19 08.19 09.19 10.19 11.19 12.19

Obrót (oś prawa) Kurs akcji (oś lewa)

Obrót (oś prawa) Revenue - right axis

Kurs akcji (oś lewa) Share price - left axis

Dividend policy In line with the Strategy of the Grupa Azoty Group for 2013–2020, which was updated in 2017, the guiding principle behind the dividend policy is to make payments proportionate to the Company’s earnings and financial condition. The General Meeting is recommended to pass resolutions on dividend payment representing up to 60% of the Company’s separate net profit for a given financial year. The main goal underpinning the Group’s financing structure is to ensure long-term financial security and internal coherence between all funding sources. Given the extensive capital investment programme in place and the risk of an economic downturn, no floor has been set for the dividend payout ratio. Accordingly, if justified, the Management Board will not recommend a dividend payment. Decisions on dividend payments are made with consideration given to a range of factors concerning the Group, and this includes prospects for its further operations and earnings, cash requirement, financial position, expansion plans and related legal requirements. Recommendations Table 36. Recommendations concerning the Parent shares between January 1st 2019 and the date of this Report Price on Recommend Target price recommend Date Broker ation (PLN) ation date (PLN) Dec 8 2019 hold PLN 9.60 PLN 10.20 DM BOŚ S.A. Oct 3 2019 sell PLN 12.20 PLN 14.00 DM BOŚ S.A. Jul 16 2019 sell PLN 11.70 PLN 14.30 DM BOŚ S.A. Jun 17 2019 hold PLN 14.20 PLN 12.60 DM BDM S.A. May 6 2019 hold PLN 16.70 PLN 14.50 DM Santander Feb 28 2019 reduce PLN 14.80 PLN 17.00 DM BDM S.A. Feb 13 2019 buy PLN 18.80 PLN 15.50 DM BOŚ S.A.

Stock performance Table 37. Stock performance Since IPO 2018 2019 High 30.00 20.90 17.50 Low 4.20 12.00 10.00 Average 14.98 17.36 13.78 Average trading volume 62,061 806 1,259

Grupa Azoty Zakłady Chemiczne Police S.A. Page 62 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

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

8. Statement of compliance with corporate governance standards Acting pursuant to Section 29.5 of the WSE Rules and Resolution No. 1013/2007 of the Management Board of the Warsaw Stock Exchange, the Management Board of the Parent hereby publishes a report on the Parent’s compliance with the corporate governance rules laid down in the “Best Practice for WSE Listed Companies 2016” in 2019.

8.1. Corporate governance code applicable to the Parent and the place where the text of the code is available to the public Observing the highest standards of communication on the capital market and corporate governance principles, in 2019 the Company complied with the ‘Best Practice for WSE Listed Companies 2016’ issued by the Warsaw Stock Exchange. The code applicable in 2019 was published as an appendix to Resolution No. 19/1307/2012 of the WSE Supervisory Board, dated November 21st 2012. Following the adoption by the WSE Supervisory Board of Resolution No. 26/1413/2015 of October 13th 2015 approving the new ‘Best Practice for WSE Listed Companies 2016’, the Company declares compliance, as of January 1st 2016, with the recommendations and principles laid down in the new code, published on the WSE’s 21and the Company’s websites. The Company declare compliance with the recommendations and principles set out in the Code of Best Practice, except for the following: IV.R.2. If justified by the structure of shareholders or expectations of shareholders notified to the company, and if the company is in a position to provide the technical infrastructure necessary for a general meeting to proceed efficiently using electronic communication means, the company should enable its shareholders to participate in a general meeting using such means, in particular through: • real-life broadcast of general meetings, • real-time bilateral communication where shareholders may take the floor during a general meeting from a location other than the general meeting, • exercise of the right to vote during a general meeting either in person or through a proxy. Explanation: Neither the Company’s Articles of Association nor the Rules of Procedure for the General Meeting provide for real-time broadcast of General Meetings. The Company believes that the documentation and proceedings of the General Meetings held to date guarantee transparency of the Company and protection of the rights of all shareholders. The Company publishes information on resolutions in the form of current reports and on its website. Thus investors are able to familiarise themselves with the matters discussed by the General Meeting. However, the Company does not rule out complying with this principle in the future. The Management Board believes that non-compliance with this recommendation will not adversely affect the reliability of the Company’s information policy and does not pose a risk of limiting or impeding shareholders’ participation in General Meetings.

21 https://static.gpw.pl/pub/files/PDF/RG/DPSN2016__GPW.pdf

Grupa Azoty Zakłady Chemiczne Police S.A. Page 63 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

I.Z.1.20 A company should operate a corporate website and publish on it, in a legible form and in a separate section, in addition to information required under the legislation, a record of the General Meeting in audio or video format.

Explanation: In the Company’s view, the way General Meetings have been documented and carried out to date ensures transparency and safeguards the rights of all shareholders. Moreover, the Company publishes information on resolutions in the form of current reports and on its website. Thus investors are able to familiarise themselves with the matters discussed by the General Meeting. The Company does not rule out complying with this principle in the future. In the opinion of the Company’s Management Board, the decision not to apply the abovementioned principle will not affect the reliability of the Company’s information policy, nor will it hinder shareholders’ participation in General Meetings. IV.Z.2. If justified by the shareholding structure, a company should ensure publicly available real-time broadcasts of general meetings.

Explanation: Neither the Company’s Articles of Association nor the Rules of Procedure for the General Meeting provide for real-time broadcast of General Meetings. The Company believes that the documentation and proceedings of the General Meetings held to date guarantee transparency of the Company and protection of the rights of all shareholders. Moreover, the Company publishes information on resolutions in the form of current reports and on its website. Thus investors are able to familiarise themselves with the matters discussed by the General Meeting. However, the Company does not rule out complying with this principle in the future. In the opinion of the Company’s Management Board, the decision not to apply the abovementioned principle will not affect the reliability of the Company’s information policy, nor will it hinder shareholders’ participation in General Meetings.

8.2. Declaration of applying the recommendations contained in the ‘Best Practice for WSE Listed Companies 2016’ I. Disclosure Policy, Investor Communications I.R.1. Where a company becomes aware that untrue information is disseminated in the media, which significantly affects its evaluation, it should immediately publish on its website a communiqué containing its position on such information, unless in the opinion of the company the nature of such information and the circumstances of its publication give reasons to follow a more adequate solution.

The Company declares to make every effort to prevent any damage that may be caused by disseminating untrue information about it. The Company seeks to ensure transparency by responding effectively to untrue information and limiting the negative effects of its dissemination. The Company takes care to provide its shareholders and the market with a true and accurate picture of Grupa Azoty Police. The Company keeps track of how it is covered in electronic media and selected press titles. I.R.2. Where a company pursues sponsorship, charity or other similar activities, it should publish information about the relevant policy in its annual activity report.

The Company pursues transparent sponsorship, charity and other similar activities. The Company’s sponsorship policy is implemented in line with the Communication Procedure of November 23rd 2016, supplemented by sponsorship policy regulations on October 30th 2018.

I.R.3. Companies should allow investors and analysts to ask questions and receive explanations – subject to prohibitions defined in the applicable legislation – on topics of their interest. This recommendation

Grupa Azoty Zakłady Chemiczne Police S.A. Page 64 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) may be implemented through open meetings with investors and analysts or in other formats allowed by a company.

The Company, pursuing an open information policy, provides all market participants, in particular current and prospective shareholders, with exhaustive and reliable information on events taking place at the Company and the Group. I.R.4. Companies should use best efforts, including taking all steps well in advance as necessary to prepare a periodic report, to allow investors to review their financial results as soon as possible after the end of a reporting period.

The Company takes all necessary steps to prepare periodic reports well in advance. This report and the reports for the first quarter 2019, first half of 2019 and third quarter 2019 were published before the respective deadlines set by the legislator. The annual report for 2018 was published on the latest date permitted by the legislator given the need to consolidate the results of the COMPO EXPERT Group acquired by the Parent in 2018. II. Management Board, Supervisory Board II.R.1. To ensure the highest standards of the management board and the supervisory board of a company in efficient fulfilment of their obligations, the management board and the supervisory board should have members who represent high qualifications and experience.

In 2019, the Management Board and the Supervisory Board were composed of persons holding university degrees in such areas as law, economics, chemical engineering, and accounting. In addition, most of them have completed postgraduate studies, e.g. in project management, postgraduate MBA programmes or specialist courses and training. II.R.2. Decisions to elect members of the management board or the supervisory board of a company should ensure that the composition of these bodies is comprehensive and diverse among others in terms of gender, education, age and professional experience.

Pursuant to Art. 20.3 of the Company’s Articles of Association, a Management Board member should have a university degree and at least three years of professional experience in a managerial position.

Given their vast competences and professional experience, including experience in serving on supervisory bodies of chemical or financial companies, members of the Management Board and Supervisory Board manage and supervise the Company’s operations properly and to a sufficient degree. II.R.3. Serving on the management board of a company should be the main area of the professional activity of management board members. Additional professional activities of management board members must not require such amounts of time and effort as would adversely affect the proper performance of the members’ duties and responsibilities at the company. In particular, management board members should not serve in governing bodies of other entities if the time devoted to such service were to prevent the proper performance of their duties and responsibilities at the company.

Some members of the Company’s Management Board have additional functions at parent entities.

II.R.4. Supervisory board members must be able to devote the time necessary to perform their duties.

The Supervisory Board exercises ongoing supervision of the Company’s operations in each area of its activity. Pursuant to Art. 34.1 of the Company’s Articles of Association, the Supervisory Board meetings are held at least once every two months. In 2019, the Supervisory Board met 17 times and held 8 votes by written ballot.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 65 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

II.R.5. If a supervisory board member resigns or is unable to perform his or her duties, the company should immediately take steps necessary to ensure substitution or replacement on the supervisory board.

If there is a threat that resignation or inability to perform his or her duties by a member of the Supervisory Board may result in a vacancy on the Board, the Company declares to take necessary steps to fill such vacancy. In the event of any temporary vacancy on the Supervisory Board, the Company will report such circumstance as a breach of the principle. Some of the Supervisory Board members are elected by the Company employees, pursuant to Art. 14 of the Act on Commercialisation and Privatisation. II.R.6. Being aware of the pending expiration of the term of office of management board members and their plans of further performance of duties on the management board, the supervisory board should take steps in advance to ensure efficient operation of the company’s management board.

The Company declares to apply this recommendation by ensuring continued operation of the Management Board, and by taking steps, sufficiently in advance, to ensure appropriate operation of the Company. II.R.7. A company should allow its supervisory board to use professional and independent advisory services necessary for the supervisory board to exercise effective supervision in the company. In its selection of the advisory services provider, the supervisory board will take into account the financial condition of the company.

Should the need arise, the Company declares to allow its Supervisory Board to use professional and independent advisory services necessary for the Board to exercise effective supervision. In its selection of the advisory services provider, the Supervisory Board will take into account the financial condition of the Company. III. Internal systems and functions III.R.1. The company’s structure should include separate units responsible for the performance of tasks within its systems or functions, unless the separation of such units is not justified by the size or type of the company’s activity.

The Company’s structure includes separate units responsible for the performance of tasks within its systems or functions. The Company’s Management Board is responsible for the implementation, maintenance, and efficiency of internal control, risk management, and compliance systems, as well as internal audit function as recommended by good practices. Persons responsible for the operation of organisational units performing tasks related to the above systems and functions report directly to the President of the Management Board or to a designated member of the Management Board. The Company has in place an audit committee. The Company’s organisational chart is presented in Section 2.1. of this Report.

IV. General Meeting, Shareholder Relations IV.R.1. Companies should strive to hold an ordinary general meeting as soon as possible after the publication of an annual report and set the date in keeping with the applicable legislation.

The Company convenes a General Meeting and sets its date in keeping with the applicable legislation, striving to hold it as soon as possible after issuing a full-year report. In 2019, the Company convened the Annual General Meeting for June 25th 2019.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 66 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

IV.R.2. If justified by the structure of shareholders or expectations of shareholders notified to the company, and if the company is in a position to provide the technical infrastructure necessary for a general meeting to proceed efficiently using electronic communication means, the company should enable its shareholders to participate in a general meeting using such means, in particular through: 1) real-life broadcast of general meetings, 2) real-time bilateral communication where shareholders may take the floor during a general meeting from a location other than the general meeting, 3) exercise of the right to vote during a general meeting either in person or through a proxy.

The Company does not apply the above recommendation. Neither the Company’s Articles of Association nor the Rules of Procedure for the General Meeting provide for real-time broadcast of General Meetings. The Company believes that the documentation and proceedings of the General Meetings held to date guarantee transparency of the Company and protection of the rights of all shareholders. Moreover, the Company publishes information on resolutions in the form of current reports and on its website. Thus investors are able to familiarise themselves with the matters discussed by the General Meeting. However, the Company does not rule out complying with this principle in the future. The Management Board believes that non-compliance with this recommendation will not adversely affect the reliability of the Company’s information policy and does not pose a risk of limiting or impeding shareholders’ participation in General Meetings. IV.R.3. Where securities issued by a company are traded in different countries (or in different markets) and in different legal systems, the company should strive to ensure that corporate events related to the acquisition of rights by shareholders take place on the same dates in all the countries where such securities are traded.

This recommendation does not apply to the Company. The Company shares are listed only on the main market of the Warsaw Stock Exchange. V. Conflict of Interest, Related Party Transactions V.R.1. Members of the management board and the supervisory board should refrain from professional or other activities which might cause a conflict of interest or adversely affect their reputation as members of the governing bodies of the company, and where a conflict of interest arises, immediately disclose it.

Members of the Management Board and the Supervisory Board have committed to refraining from professional or other activities which might cause a conflict of interest. If a conflict of interest arises, the involved member of the Management Board or the Supervisory Board is obliged to inform the Management Board or the Supervisory Board, as appropriate, of the existing or potential conflict of interest and to abstain from voting on resolutions concerning matters which might involve this member in a conflict of interest. Any conflicts of interest are immediately and thoroughly investigated. VI. Wages and salaries VI.R.1. The remuneration of members of the company’s governing bodies and key managers should follow the approved remuneration policy.

The remuneration of members of the Company’s governing bodies and key managers follows the Company’s remuneration policy. For details of the Company’s remuneration policy, see Section 8.14 of this Report. VI.R.2. The remuneration policy should be closely tied to the company’s strategy, its short- and long-term goals, long-term interests and results, taking into account solutions necessary to avoid discrimination on whatever grounds.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 67 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

The Company’s remuneration policy is closely tied to the Company’s strategy, its goals, interests, and results. For details of the Company’s remuneration policy, see Section 8.14 of this Report. VI.R.3. If the supervisory board has a remuneration committee, principle II.Z.7 applies to its operations.

This recommendation does not apply to the Company. The Company’s Supervisory Board has no remuneration committee. VI.R.4. The remuneration of members of the management board and the supervisory board and key managers should be sufficient to attract, retain and motivate persons with skills necessary for proper management and supervision of the company. Remuneration should be adequate to the scope of tasks delegated to individuals, taking into account additional duties, for instance on supervisory board committees.

The remuneration of members of the Company’s Management Board, Supervisory Board, and key managers is sufficient to attract, retain and motivate persons with skills necessary for proper management and supervision of the Company, and the remuneration is adequate to the scope of tasks delegated to those individuals. For detailed rules of remuneration of the Management Board members, see Section 8.14 of this Report. For detailed rules of remuneration of the Supervisory Board members, see Section 8.14 of this Report.

8.3. Features of the internal control and risk management systems used by the Company In November 2009, the Supervisory Board established an Audit Committee in order to improve the efficiency of the Board’s work and to strengthen control over the Parent and the Group. The Audit Committee is an advisory body acting collectively within the Supervisory Board. The key areas monitored by the Audit Committee are the financial reporting processes and effectiveness of the internal financial control, internal audit and risk management systems in place at the Company. For a full description of the Audit Committee’s responsibilities, see further parts of this Report. At the Company, risk management is consistent with the Grupa Azoty Group Enterprise Risk Management Policy and the Risk Management Procedure in place. In line with internal regulations, risk management consists of the following steps: 1. Identification of risks and opportunities 2. Assessment of risks and controls in place 3. Preparation of mitigation plans against specific risks 4. Risk monitoring and reporting. Risk management at the Company is a continuous process. Risk identification, which takes account of market research findings and key regulatory changes, is conducted on an ongoing basis. Based on the identified risks, a periodic qualitative and quantitative analysis is carried out by the respective risk owners. The periodic review findings are recorded in Risk Information Sheets and Risk Register, and the collected data is used in periodic reports prepared for the Management Board and Audit Committee. Risks are managed by the respective risk owners, who adopt risk management strategies, perform day-to-day activities to analyse relevant risk factors and monitor risk levels. The Company constantly works to hone the risk management process and improve its efficiency. Solutions are in place enabling the management and supervisory bodies to fully monitor the risk management process. Consequently, individual measures form a systematic approach to risk management at the Company. This systematic approach is applied in performing tasks undertaken to review and ensure the correctness and effectiveness of measures taken to manage specific identified risks. The Company’s Internal Audit Department reports directly to the CEO – President of the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. This ensures hierarchical independence for audits and inspections.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 68 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Internal audit at the Company takes the form of an independent, objective assessment of processes, systems and procedures in place at the Company’s units and subsidiaries, which enables more effective pursuit of Company objectives, identification of areas for operational improvement, and risk mitigation. The internal audit function also involves advisory services. Within the system, the instruments used to manage risks related to the process of preparation of financial statements include internal regulations governing the identification and recording of business events, as well as their presentation and publication. Direct supervision and coordination of work related to the preparation of financial statements falls within the remit of the Chief Accountant. The Company’s financial statements cover all aspects of its business operations. The heads of individual organisational units (departments, business units, support centres, divisions) are responsible for the content of the financial statements in the areas assigned to them under the Company’s organisational structure. Management Board members are actively involved in the preparation of financial statements at each stage of the process, by contributing to the production of individual components and final review of the contents. Also members of the Audit Committee monitor the process of preparation and audit of financial statements. After they are approved by the Management Board, the Company’s financial statements are audited by an independent qualified auditor appointed by the Company’s Supervisory Board.

8.4. Management standards and systems The Management Policy implemented at the Company sets out the mission, courses of action and strategic objectives implemented based on management systems compliant with the highest international standards. The ever-growing social requirements and expectations regarding process safety and offering products which are safe and meet customer expectations requires conscious care for the product along the entire value chain, from raw materials to final application. Based on its strategy, long-standing tradition, recognised brand, as well as Grupa Azoty’s support, the Company wants to strengthen its market position and meet the expectations of its business and social partners by: • monitoring global trends in applied technologies, ensuring continuous development and improvement of processes and products; • enhancing employees’ competences and optimal use of resources, creating conditions for the development of the entire Company; • continuously adjusting product quality and range to customer requirements; • building strong and effective customer relationships and providing professional customer service; • reducing the sensitivity to changes in external costs of energy through the use of effective technologies and energy-efficient solutions; • reducing production costs through upgrades of key production lines; • improving the effectiveness of key processes and of knowledge gathering and management. The Company follows environmental protection principles as an integral part of the continuous improvement process, striving to achieve lasting and sustainable development which would respond to the needs of present and future generations. The Company strives to create optimum working conditions in a systemic and continuous manner, minimising risks at workplaces and improving OHS procedures in all management processes. The Company pursues a Management Policy which guarantees that strategic goals are achieved in reliance on an Integrated Management System consistent with international standards. The Integrated Management System is customer-centric and is structured around the principles of reducing environmental losses, mitigating the risk of hazards, and ensuring continuous improvement. The Company uses the following management systems to ensure its actions and initiatives are effective: • Quality Management System compliant with the ISO 9001:2015 standard; • Environmental Management System compliant with the ISO 14001:2015 standard; • Energy Management System compliant with the ISO 50001:2018 standard; • Occupational Health and Safety Management System compliant with the BS OHSAS 18001:2007 standard;

Grupa Azoty Zakłady Chemiczne Police S.A. Page 69 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

• Management System compliant with the PN-EN ISO/IEC 17025:2017 standard (setting general requirements for the competence of testing and calibration laboratories); • Food Safety Management System compliant with the ISO 22000:2005 standard; • Product Stewardship Standard Fertilizers Europe. These systems are subject to periodic assessment and recertification. The Company assesses the compliance of its activities with the implemented management systems and legal requirements. Compliance with quality, environmental, workplace health and safety, food safety, energy management and laboratory competence requirements is tested in the course of internal audits of the management systems. Audit findings are presented at management reviews attended by representatives of top management and serve as the basis for improvement recommendations. External audits carried out by certification bodies confirm compliance of the Company’s management systems with relevant standards, which has been documented by appropriate certificates.

8.5. Shareholding structure Table 38. Shareholding structure as at the date of this Report Number of Ownership Number of % of total Shareholder shares interest (%) voting rights voting rights Grupa Azoty S.A. 78,051,500 62.86 78,051,500 62.86 OFE PZU Złota Jesień 16,092,634 12.96 16,092,634 12.96 ARP S.A. 16,299,649 13.13 16,299,649 13.13 State Treasury 9,273,078 7.47 9,273,078 7.47 Other shareholders 4,458,907 3.58 4,458,907 3.58 124,175,768 100.00 124,175,768 100.00

Table 39. Shareholding structure as at December 31st 2019 Number of Ownership Number of % of total Shareholder shares interest (%) voting rights voting rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 12,187,694 16.25 12,187,694 16.25 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other shareholders 2,944,984 3.93 2,944,984 3.93 75,000,000 100.00 75,000,000 100.00 * The number of allotment certificates in respect of the Company’s new Series C shares allotted to individual shareholders listed in the table at December 31st 2019: Grupa Azoty S.A. – 28,551,500 allotment certificates, OFE PZU Złota Jesień – 3,889,940 allotment certificates, ARP S.A. – 9,691,683 allotment certificates, the State Treasury – 5,513,722 allotment certificates.

Table 40. Shareholding structure as at December 31st 2018 Number of Ownership Number of % of total Shareholder shares interest (%) voting rights voting rights Grupa Azoty S.A. 49,500,000 66.00 49,500,000 66.00 OFE PZU Złota Jesień 12,140,000 16.19 12,140,000 16.19 ARP S.A. 6,607,966 8.81 6,607,966 8.81 State Treasury 3,759,356 5.01 3,759,356 5.01 Other shareholders 2,992,678 3.99 2,992,678 3.99 75,000,000 100.00 75,000,000 100.00

8.6. Special control powers of securities holders All the Company shares carry the same rights. The State Treasury’s right to call General Meetings and to appoint and remove a Supervisory Board member are discussed in Sections 8.9 and 8.11 of this Report.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 70 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

8.7. Restrictions on voting rights There are no restrictions on the exercise of voting rights, such as restrictions on the exercise of voting rights by holders of a specific proportion or number of voting rights or time restrictions on the exercise of voting rights, etc.

8.8. Restrictions on the transferability of securities The Company’s Articles of Association impose no restrictions on the transferability of shares other than those provided for in the generally applicable laws.

8.9. Rules governing appointment and removal from office of management personnel; powers of such personnel, including their authority to decide on the issue or buy-back of shares Management Board Procedures for the appointment of management personnel and for the granting of their powers The Company’s Management Board comprises from one to five persons, including the President, Vice- Presidents and Members of the Management Board. The number of Management Board members is defined by the governing body that appoints the Management Board. The Management Board’s joint term of office is 3 (three) years. A member of the Management Board must meet the requirements for candidates to management bodies, laid down in the Act on State Property Management of December 16th 2016. Members of the Management Board tender their resignations in writing to the Supervisory Board. Subject to the following provision, members of the Management Board or the entire Management Board are appointed by the Supervisory Board, following a recruitment process held to verify and evaluate the qualifications of candidates and to select the best candidate. The rules of and procedure for the recruitment process are set out in a resolution of the General Meeting As long as the State Treasury holds Company shares and the Company’s annual average workforce exceeds 500, the Supervisory Board appoints to the Management Board one person elected by the Company’s employees for the duration of the Management Board’s term of office. The person who receives the highest number of validly cast votes is considered to be a Management Board candidate elected by employees. The election results are binding on the Supervisory Board if at least 50% of all eligible employees participate in the election. The election is a direct election held by secret ballot and open to all employees, and is conducted by the Election Committees appointed by the Supervisory Board from among the Company’s employees. Failure by the Company’s employees to elect a member of the Management Board does not prevent the Management Board from adopting valid resolutions. Each member of the Management Board may be removed from office or suspended from their duties by the Supervisory Board or the General Meeting. The Management Board manages the Company’s affairs and represents the Company in and out of court. The operating procedures and the division of responsibilities among members of the Management Board are defined in the Rules of Procedure for the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A., adopted by the Management Board’s resolution and approved by the Supervisory Board. Pursuant to the Rules, the powers and responsibilities for the supervision of individual areas of the Company’s business are defined by the Management Board by way of resolutions. The Management Board is not authorised to make a decision to issue or buy back shares. Supervisory Board Rules governing appointment of supervisory staff The Supervisory Board consists of five to nine members appointed by the General Meeting, with the proviso that: • as long as the State Treasury holds Company shares, the entity authorised to exercise rights conferred by the shares held by the State Treasury has the right to appoint and remove from

Grupa Azoty Zakłady Chemiczne Police S.A. Page 71 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

office one member of the Supervisory Board. Such appointment or removal from office becomes effective upon delivery of the relevant statement to the Management Board. • Some of the Supervisory Board members are elected pursuant to Art. 14 of the Act on Commercialisation and Certain Employee Rights. Supervisory Board members are appointed for a joint three-year term of office. A member of the Supervisory Board appointed by the General Meeting may be removed by the General Meeting at any time. Candidates to the Supervisory Board appointed, nominated or proposed by the State Treasury or a state-owned legal person, or by the Company’s parent within the meaning of Art. 4.3 of the Competition and Consumer Protection Act of February 16th 2007, should meet the requirements set out in Art. 19 of the Act on State Property Management of December 16th 2016. Supervisory Board Members may tender their resignations to the Management Board in writing. The procedure for election of the Supervisory Board members by the employees is defined in detail in relevant election rules, adopted by the Supervisory Board by way of a resolution and approved by the General Meeting. The results of an election held in accordance with the provisions referred to above are binding on the General Meeting. The Chairperson of the Supervisory Board is appointed by the General Meeting. The Deputy Chairperson and the Secretary are elected by the Supervisory Board, at its first meeting, from among its members.

8.10. Rules governing amendments to the Parent’s Articles of Association Resolutions to amend the Articles of Association are passed following a three-quarters majority vote at the General Meeting.

8.11. Operation of the General Meeting The General Meeting operates in accordance with the Articles of Association and the Rules of Procedure for the General Meeting, which set out in particular the rules governing the operation of the General Meeting, the holding of meetings and adoption of resolutions. The General Meeting adopts the Rules of Procedure by way of a resolution. The General Meeting strives to ensure the stability of the Rules of Procedure. Convening a General Meeting and Meeting agenda The General Meeting is convened by the Company’s Management Board: • on its own initiative; • at the request of the Supervisory Board, expressed in the Supervisory Board’s resolution; • at the written or electronic request from a shareholder or shareholders representing at least one- twentieth of the share capital; • at the written request of the State Treasury (shareholder) irrespective of its interest in the share capital, submitted no later than one month before the proposed date of the General Meeting. The Annual General Meeting is convened by the Management Board every year, and it should be held within six months of the end of the previous financial year. The business of the Annual General Meeting covers: • review and approval of the financial statements for the previous financial year and of the Directors’ Report on the Company’s operations, • granting discharge to members of the Company’s governing bodies in respect of their duties, • distribution of profit or coverage of loss, • deciding on the dividend record date, on the dividend payment date and on payment of dividend in instalments, and • review and approval of the Group’s consolidated financial statements for the previous financial year and of the Directors’ Report on the Group’s operations, if their preparation is required under Polish law. The General Meeting may only pass resolutions concerning matters included in its detailed agenda. However, the General Meeting may pass a resolution on a matter not included in its agenda if the entire share capital is represented at the Meeting and none of those present objects to the adoption

Grupa Azoty Zakłady Chemiczne Police S.A. Page 72 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) of a resolution on the matter. Furthermore, the General Meeting may vote on resolutions concerning proposals to convene an Extraordinary General Meeting and procedural matters even if they have not been included on the agenda. The agenda is proposed by the Company’s Management Board or another entity which convenes the General Meeting. A shareholder or shareholders representing at least one- twentieth of the Company’s share capital may request that certain items be placed on the agenda of the next General Meeting. The same right is held by the State Treasury as the Company’s shareholder, irrespective of its interest in the share capital. Such requests with the statement of reasons, or draft resolutions on proposed items on the agenda, should be submitted at least 21 days prior to the scheduled date of the General Meeting. A shareholder or shareholders representing at least one-twentieth of the share capital may, before the date of the next General Meeting, submit draft resolutions concerning items placed or to be placed on the agenda of the General Meeting. The same right is held by the State Treasury as the Company’s shareholder, irrespective of its interest in the share capital. Draft resolutions to be recommended for adoption by the General Meeting, and other important materials, must be presented to the shareholders together with the statement of reasons and the Supervisory Board’s opinion thereon prior to the General Meeting, sufficiently in advance to enable the shareholders to read and assess them. From the date of calling the General Meeting, the Company publishes draft resolutions and all materials relating to the agenda on its website, at the following address: https://zchpolice.grupaazoty.com Adoption of resolutions The General Meeting makes its decisions by way of resolutions. Resolutions are passed by voting. Resolutions are passed by an absolute majority of votes, unless the Commercial Companies Code, the Articles of Association and these Rules provide otherwise. Votes are taken by open or secret ballot, depending on the requirements set out in the Commercial Companies Code and the Articles of Association. Before calling a vote, the Chairperson of the General Meeting reads aloud the draft resolution. The text of a resolution put to vote should be formulated in a manner that enables any eligible person who disagrees with how a given matter is resolved to challenge the resolution. Voting may be carried out with the use of electronic devices, including those based on IT systems. Powers and responsibilities of the General Meeting Powers of the General Meeting include in particular: • review and approval of the financial statements for the previous financial year and of the Directors’ Report on the Company’s operations, • granting discharge to members of the Company’s governing bodies in respect of their duties, • distribution of profit or coverage of loss, • deciding on the dividend record date, on the dividend payment date and on payment of dividend in instalments, and • review and approval of the consolidated financial statements of the Group for the previous financial year and of the directors’ report on the Group’s operations if their preparation is required under the Accounting Act, • appointment and removal of the Supervisory Board members appointed by the General Meeting, including the Chairperson of the Supervisory Board, subject to the provisions of Art. 30.1 and Art. 32 of these Articles of Association, • determination of the rules and amounts of remuneration for Supervisory Board members, • granting consent to disposal or lease of the Company’s business or its organised part, and establishment of limited property rights in the Company’s business or its organised part, • approval of the following legal transactions if the market value of assets involved in such transaction exceeds PLN 100,000,000 (one hundred million złoty) or 5% of the Company’s total assets: o disposal of real property, perpetual usufruct right, or interest in real property or perpetual usufruct right, o disposal of other non-current assets, o granting of the right to use non-current assets to another entity for a period longer than 180 days in a calendar year, o disposal of shares in another company, • approval of the following legal transactions if the value of assets involved in such transaction exceeds PLN 100,000,000 (one hundred million złoty) or 5% of the Company’s total assets:

Grupa Azoty Zakłady Chemiczne Police S.A. Page 73 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

o acquisition of non-current assets, o subscription for or acquisition of shares in another company, • establishing the rules for disposal of non-current assets whose market value exceeds 0.1% of the Company’s total assets, • approval of the execution by the Company of a loan, surety, or any other similar agreement with or for the benefit of a member of the Management Board, Supervisory Board, commercial proxy, or liquidator, • increase or reduction of the Company’s share capital, • issue of convertible bonds, bonds with pre-emptive rights and subscription warrants, • a squeeze-out carried out in compliance with applicable laws, • creation, use, and release of capital reserves, • use of statutory reserve funds, • decisions with respect to claims for redress of damage inflicted in the course of establishing the Company, its management or supervision, • merger, transformation, or demerger of the Company, • amendments to the Articles of Association and change of the Company’s business, • dissolution and liquidation of the Company, • review of the Supervisory Board’s reports referred to in Art. 28.1.8, Art. 28.1.20, Art. 28.1.22, and Art. 28.1.23, • approval of the election rules referred to in Art. 32 of these Articles of Association, as adopted by the Supervisory Board, defining the procedure for election of a Supervisory Board member by the employees, • adoption of the rules of procedure for the General Meeting, defining in detail how the Meeting should proceed and pass resolutions, • establishing the rules for determining remuneration of Management Board members, • defining the rules and procedures for conducting the recruitment procedure for the position of a member of the Company’s Management Board.

8.12. Composition, change and operation of the Company’s management and supervisory bodies Parent’s Management Board As at January 1st 2019, the composition of the Management Board was as follows: • Wojciech Wardacki, Ph.D. – President of the Management Board, • Włodzimierz Zasadzki, Ph.D. − Vice President of the Management Board, • Tomasz Panas − Vice President of the Management Board, • Anna Tarocińska − Member of the Management Board (representing Company employees). During the financial year and by the date of issue of this Report, the composition of the Management Board remained unchanged. 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.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 74 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

As at the issue date of this Report, the division of powers and responsibilities among the Management Board members is governed by: • Management Board Resolution No. 532/VIII/19 of July 9th 2019 on 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. 223/VIII/18 of December 14th 2018), approved by the Supervisory Board in Resolution No. 269/VII/18 of December 21st 2018. Pursuant to Management Board Resolution No. 532/VIII/19 of July 9th 2019, the supervisory powers and responsibilities are divided among the Company’s Management Board members as follows: • Wojciech Wardacki, Ph.D., President of the Management Board and Chief Executive Officer: o Central Dispatch Division, o Internal Audit Division, o Public Relations Office, o Security Office, o Technology Development Office, o Human Resources and Management Department, o Technical Department. • Włodzimierz Zasadzki, Vice President of the Management Board: o Finance Department, o Controlling Department, o Strategic Procurement Department, o Tendering Department, o Fertilizer Sales Department, o Corporate Agro Sales Department, o Fertilizers Business Unit. • Tomasz Panas, Vice President of the Management Board: o Nitro Business Unit, o Pigments Business Unit, o Power Centre, o Infrastructure Centre, o Laboratory Analysis Centre, o Logistics Centre. • Anna Tarocińska, Management Board member elected by employees: o Technical Safety Department. 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 oversee and coordinate the following business processes: • Wojciech Wardacki, Ph.D., President of the Management Board and Chief Executive Officer: o Strategic management, o Comprehensive customer support, o Human resources management, o Investment project management. • Włodzimierz Zasadzki, 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. • Anna Tarocińska, Management Board member elected by employees: o Technical and environmental safety. The President of the Management Board, assisted by the unit responsible for providing support to the Company’s governing bodies, performs ongoing supervision of the implementation of resolutions of the Parent’s Management Board, Supervisory Board, and General Meeting. The President of the Management Board convenes Management Board meetings on his/her own initiative, or at the request

Grupa Azoty Zakłady Chemiczne Police S.A. Page 75 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) of a member of the Management or Supervisory Board, sets the agenda and chairs the meetings. In the President’s absence, these activities are performed by a Management Board member designated by the President of the Management Board. In accordance with the Organisational Rules of Grupa Azoty Zakłady Chemiczne Police S.A., President of the Management Board – Chief Executive Officer exercises general supervision of the Company’s operations and is assisted by directors of departments, business units and centres, as well as by managers of other organisational units. Powers and responsibilities of the President of the Management Board - Chief Executive Officer include: • general supervision and coordination of Company’s activities, • promoting a good image of the Company as a corporate citizen, • managing the work of the Company’s Management Board and presiding over its meetings, • performing the Company’s responsibilities as an employer within the bounds of the Polish Labour Code, • supervising the restructuring and privatisation processes at the Company and its subsidiaries, • supervising and coordinating business processes specified in the Management Board Rules of Procedure, and supervising organisational units that report directly to the President of the Management Board – Chief Executive Officer, • approving internal audit, business control and stocktaking plans, as well as making decisions on their implementation, and • representing the Company in and out of court, jointly with another Management Board member or proxy. Supervisory Board Composition of the Company’s Supervisory Board as at January 1st 2019 was as follows: • Joanna Habelman − Chairwoman of the Supervisory Board, • Mirosław Kozłowski − Deputy Chairman of the Supervisory Board, • Bożena Licht − Secretary of the Supervisory Board, • Agnieszka Dąbrowska − Member of the Supervisory Board, • Andrzej Malicki − Member of the Supervisory Board, • Maria Więcek − Member of the Supervisory Board. On June 25th 2019, the Supervisory Board commenced its new, 8th joint term of office. As at the date of this Report, the Supervisory Board was composed of the following persons: • Mariusz Kądziołka – Chairman of the Supervisory Board, • Mirosław Kozłowski − Deputy Chairman of the Supervisory Board (nominated by the State Treasury), • Bożena Licht − Secretary of the Supervisory Board, • Agnieszka Dąbrowska − Member of the Supervisory Board, • Andrzej Rogowski – Member of the Supervisory Board, • Iwona Wojnowska – Member of the Supervisory Board. The Supervisory Board operates on the basis of: • Commercial Companies Code of September 15th 2000 (Dz.U. No. 94, item 1037, as amended), • Act on Commercialisation and Privatisation, • Accounting Act, • Act on Statutory Auditors, Audit Firms, and Public Oversight, • Company’s Articles of Association, • Rules of Procedure for the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. Audit Committee On November 23rd 2009, the Supervisory Board established an Audit Committee (Resolution No. 342/IV/09) to improve the effectiveness of the Board’s work and to strengthen control over the Parent and the Group. The Audit Committee is an advisory body acting collectively within the Supervisory Board. As at January 1st 2019, the composition of the Audit Committee was as follows: • Joanna Habelman − Chairwoman of the Audit Committee, • Agnieszka Dąbrowska − Secretary of the Audit Committee, • Mirosław Kozłowski − Member of the Audit Committee, • Maria Więcek − Member of the Audit Committee.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 76 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Following changes to the composition of the Supervisory Board, the composition of the Audit Committee changed and as at the date of this Report was as follows: • Mariusz Kądziołka – Chairman of the Audit Committee, • Agnieszka Dąbrowska − Member of the Audit Committee, • Mirosław Kozłowski − Member of the Audit Committee, • Andrzej Rogowski – Member of the Audit Committee.

The Audit Committee’s tasks include in particular: a. monitoring of: 1) the financial reporting process, 2) the effectiveness of internal control and risk management systems as well as internal audit systems in place at the Company, including effectiveness of the financial reporting process, 3) performance of financial audit, in particular an audit conducted by the audit firm, taking into account all recommendations and findings of the Audit Oversight Commission resulting from audits carried out at the audit firm; b. controlling and monitoring of the independence of the qualified auditor and the audit firm, in particular when the audit firm also provides services other than the audit of financial statements; c. informing the Supervisory Board of the audit findings and explaining how the audit contributed to the reliability of the Company’s financial reporting and what role the Audit Committee played in the audit; d. assessing the auditor’s independence and approving the provision of permitted non-audit services by the auditor; e. developing a policy for selecting an audit firm to conduct the audit; f. developing a policy for providing permitted non-audit services by the audit firm carrying out the audit, entities related to the audit firm or a member of the audit firm’s network; g. establishing an audit firm appointment procedure for the Company; h. giving recommendations to the Supervisory Board on the appointment of auditors or auditing firms in line with the procedures referred to in sections e and f; i. submitting recommendations to ensure the reliability of the financial reporting process at the Company. Detailed rules of operation of the Audit Committee are provided for in the Rules of Procedure for the Audit Committee approved by Resolution No. 159/VII/17 of the Company’s Supervisory Board of December 28th 2017. Independence, knowledge and skills of Audit Committee members The Chair of the Audit Committee Mariusz Kądziołka meets the knowledge and competence requirements set out in Art. 129.1 of the Act on Statutory Auditors, Auditing Firms, and Public Oversight. Mariusz Kądziołka graduated from the Faculty of Economics and Food Economics Organisation of the West Pomeranian University of Technology in Szczecin in banking and application of mathematical methods and IT solutions in economics. He also completed a post-graduate programme in internal audit and control in management improvement at the University of Szczecin as well as an Executive Master of Business Administration programme at the University of Commerce and Services (WSHIU) in Poznań. He also studied at the Poznań Management Education Centre, where he earned the title of a HR manager. In addition, Mr Kądziołka passed an internal auditor examination before the Minister of Finance of the Republic of Poland and completed a training course organised by the General Inspector of Financial Information. He also attended numerous training courses in public procurement, accounting, ethics in public life, diplomacy, property management and regional labour partnership − Local Partnership Specialist. Mariusz Kądziołka began his professional career in 1994. He worked for central government units, local governments and businesses. In 2011−2016, he was Deputy Mayor of the City of Szczecin, responsible for the management of municipal infrastructure and safe operation of the city, including water and wastewater management, waste management, energy and heat management as well as environmental protection and development. Mariusz Kądziołka also worked in the Audit and Internal Control Department of the Szczecin Municipal Office, where he was responsible for financial audits of the organisational units of Szczecin and the limited liability companies in which the city held interests. Between 2012 and 2016, he was Vice President of the Spółka Wodna Międzyodrze Management Board. In February 2016, he was appointed President of the Management Board of Enea Oświetenie Spółka z o.o., and in March 2019 he became Chairman of the Supervisory Board of Grupa

Grupa Azoty Zakłady Chemiczne Police S.A. Page 77 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Azoty Koltar Spółka z o.o. Since June 2019, Mr Kądziołka has served as Chairman of the Company’s Supervisory Board. All members of the Audit Committee meet the independence criteria stipulated in Art. 129.3 of the Act. Moreover, Andrzej Rogowski, who is an employee representative, meets the requirement of having knowledge and skills in the industry in which the Company operates, as laid down in Art. 129.5 of the Act. In 2005, Mr Rogowski received a bachelor’s degree from the Faculty of Economic Policy and Market of the Department of Economics and the Food Economics Organisation of the West Pomeranian University of Technology in Szczecin. In 2007, he obtained a Master’s degree in Economics and Enterprise Management at that university. In 2014, he started an annual postgraduate programme at the Łódź University of Technology’s Faculty of the Occupational Safety Engineering of the Process and Environmental Protection Department – Safety of Industrial Processes. In the years that followed, Mr Rogowski also completed a postgraduate course in Occupational Health and Safety at the Faculty of Construction and Architecture of the West Pomeranian University of Technology in Szczecin. He also completed a number of training courses, including in controlling for production and technical staff, trade negotiations, public relations, investment process, labour law, identifying the causes and circumstances of accidents at work, the Seveso III Directive and prevention of major industrial accidents. Mr Rogowski’s extensive professional experience, spanning 34 years, and the knowledge gained at Polish universities allow him to professionally monitor the operation of the Company’s organisational units and regularly inspect workstations in production, maintenance and investment with regard to the wide scope of the Company’s business. Since 2012, Andrzej Rogowski has acted as a person of public trust – the Company Social Labour Inspector. In connection with holding that office, he received a special award from Poland’s Chief Labour Inspector. Mr Rogowski started his professional career at Grupa Azoty Zakłady Chemiczne Police S.A.’s I&C Department. He also worked as an operator, insulation worker, technology specialist and contract coordination specialist in the Mechanical Engineering Plant, Construction Department. As a contract coordination specialist, Mr Rogowski was responsible for coordinating maintenance and investment work carried out for the Company by third parties performing construction, anti-corrosion, chemical resistance, chimney, engineering, electrical and other works. Permitted non-audit services On March 29th 2018, the Audit Committee, having concluded that no indication existed that the auditor’s independence might be threatened, passed Resolution No. 66/18 to give consent for Ernst & Young Audyt Polska Sp. z o.o. sp. k. to provide permitted non-audit services related to: • review of the Company’s half-year financial statements; • review of the Company’s half-year consolidation packages; • audit of the Company’s full-year consolidation packages; • audit of the full-year consolidation packages prepared by the following subsidiaries: o Grupa Azoty Police Serwis Sp. z o.o., o Koncept Sp. z o.o., o Grupa Azoty Transtech Sp. z o.o., o Zarząd Morskiego Portu Police Sp. z o.o., o Grupa Azoty Polyolefins S.A. The services will cover the period from 2017 to 2019. Furthermore, on April 8th 2019, having concluded that no indication existed that the auditor’s independence might be threatened, the Audit Committee, by way of Resolution No. 75/19 approved the provision by Ernst & Young Audyt Polska Spółka z ograniczoną odpowiedzialnością sp. k. of permitted non-audit services related to the provision of agreed-upon procedures consisting in assurance of the data contained in the issue prospectus prepared in connection with an increase of the Parent’s share capital, for the purposes of Dom Maklerski PKO BP S.A., the offering broker. Key features of the auditor selection and appointment policy The Policy on Selection and Appointment of Audit Firm to Audit Financial Statements of Grupa Azoty Zakłady Chemiczne Police S.A. was adopted in line with the recommendation of the Audit Committee by way of Resolution No. 142/VII/17 of the Company’s Supervisory Board on October 21st 2017. It was then reviewed and left unamended by the Company’s Supervisory Board. The Policy was last reviewed under Resolution No. 48/VIII/20 of January 16th 2020. The key provisions of the Policy are as follows:

Grupa Azoty Zakłady Chemiczne Police S.A. Page 78 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

• The Company is a public interest entity within the meaning of the Act on Statutory Auditors, and the Group’s parent company. • The Company’s financial statements are subject to statutory audits and reviews by an audit firm, in accordance with applicable laws, including International Standards. • The period of uninterrupted engagement of an audit firm, or its affiliated audit firm or a member of their network operating in the European Union, to perform statutory audits referred to in the second paragraph of Article 17(1) of Regulation 537/2014, may not exceed five years. • The lead auditor may not conduct statutory audits at the same public interest entity for more than five years. • The lead auditor may again conduct statutory audits of the entity referred to in Section 4.4 at least three years after the end of the last statutory audit performed by the lead auditor. • The term of the initial audit engagement letter with an audit firm should not be less than two years, with an option to extend the term for further periods of at least two years. The aggregate duration of the engagement may not exceed the period specified in item (3) above. • The criteria applied by Audit Committee and Supervisory Board members when selecting an audit firm should include: o whether the audit firm and the lead auditor meet the independence and impartiality criteria set out in the Act on Statutory Auditors and in Regulation 537/2014; o Whether the independence of the audit firm and the lead auditor is not threatened, including whether the audit firm does not provide to the Company or its controlled companies any services that are prohibited under the Regulation and the Act on Statutory Auditors; o whether the audit firm has competent staff, time and other resources necessary to properly conduct the audit; o whether the audit firm has the knowledge of the industry in which the Company operates; o whether the audit firm and the lead auditor meet other criteria defined in applicable laws, including those relating to the period of rotation of the audit firm and the lead auditor.

Key features of the policy on provision of permitted non-audit services The Non-Audit Services Policy was adopted on the Audit Committee’s recommendation by the Supervisory Board’s Resolution No. 141/VII/17 of October 19th 2017 and was subsequently reviewed and amended by the Supervisory Board’s Resolution No. 251/VII/18 of September 21st 2018. Following subsequent revisions, the Policy was not amended. The Policy was last reviewed under Supervisory Board’s Resolution No. 48/VIII/20 of January 16th 2020. The purpose of the Policy is to ensure that the Company’s activities are compliant with the Act on Statutory Auditors, Audit Firms, and Public Oversight of May 11th 2017, including Art. 130.1 of the Act, and with Regulation (EU) No 537/2014 of the European Parliament and of the Council of April 16th 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC. The key provisions of the Policy are as follows: • The statutory auditor or the audit firm may not provide any prohibited services, within the meaning of Regulation 537/2014 or the Act on Statutory Auditors, directly or indirectly to the Company or its controlled companies: o from the beginning of the audited period until the date of issue of the audit report; o in the financial year immediately preceding the period referred to in item (1) above, in respect of the services comprising the provision and implementation of internal control or risk management procedures related to the preparation and/or control of financial information, or the design and implementation of financial information technology systems. • The statutory auditor or the audit firm may provide non-audit services to the Company or its controlled companies, provided that the Audit Committee approves the provision of such services after having carried out an appropriate assessment of the threats to and safeguards of the audit firm’s independence. • The Policy defines the following non-audit services approval procedure: o A request for approval of the provision of non-audit services by the audit firm is submitted to the Audit Committee through the Management Board Office by: 1) member of the Management Board in charge of Finance, upon request from the Company’s organisational unit concerned, where the services are to be provided to the Company; or

Grupa Azoty Zakłady Chemiczne Police S.A. Page 79 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

2) member of the Management Board in charge of Finance, upon request from the controlled company concerned submitted through the Company’s Corporate Management Office, where the services are to be provided to a controlled company. o Before considering the request referred to in paragraph (1), the Audit Committee must undertake an independence assessment based on the information concerning past experience of working with the audit firm as well as information contained in the request referred to in paragraph (1). o In making a decision concerning the request referred to in paragraph (1), the Audit Committee may: 1) consult experts; 2) request that the Company, its controlled companies or the audit firm provide relevant documents or information necessary to perform the independence assessment referred to in paragraph (2). o If a positive independence assessment is issued and there are no other reasons to refuse the consent, the Audit Committee may grant its consent for the provision of non-audit services. o When considering the request referred to in paragraph (1), the Audit Committee may issue guidelines or recommendations relating to the audit firm’s engagement. o The Company must communicate that the Audit Committee has granted its consent for the provision of non-audit services to the Company and its controlled companies every time such consent is issued. Such information is communicated by the Company’s Management Board Office through the Corporate Supervision Department of Grupa Azoty S.A. to a member of the Management Board of Grupa Azoty S.A. in charge of Finance, who forwards the communication to the Audit Committee of Grupa Azoty S.A. Auditor appointment recommendation A recommendation to appoint Ernst & Young Audyt Polska Spółka z ograniczoną odpowiedzialnością sp. k. of Warsaw for 2017–2019 was issued by the Audit Committee on June 20th 2017 by Resolution No. 58/17 concerning a recommendation to the Company’s Supervisory Board on the appointment of an audit firm. By Resolution No. 79/19 of September 17th 2019 on recommendation to the Company’s Supervisory Board on the appointment of an audit firm for the Group companies for 2020–2021, the Audit Committee recommended that the Supervisory Board should make a selection from among the following companies: • BDO Spółka z ograniczoną odpowiedzialnością spółka komandytowa, ul. Postępu 12, 02-676 Warsaw (“BDO”), • Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością spółka komandytowa, Rondo ONZ 1, 00-124 Warsaw, with BDO as the preferred choice. Frequency of Audit Committee meetings In 2019, the Supervisory Board’s Audit Committee held 11 meetings and 1 correspondence vote and passed 9 resolutions. The most important business of the Audit Committee included: • monitoring the Internal Audit Division; • monitoring the Company’s risk management system and identified risk; • monitoring the financial reporting process; • monitoring the conduct of financial audit activities; • reviewing the policy and procedure for the selection and appointment of an audit firm to audit financial statements of the Company and the non-audit services policy.

8.13. Diversity policy While the Company has not implemented any formal diversity policy, in its operations it follows clear rules governing employment and promotion. It also seeks to achieve diversity in terms of gender, education, age and professional experience of its entire workforce, including in particular members of the governing bodies and key management personnel. In accordance with the principle of non- discrimination stipulated in Art. 113 of the Labour Code: Any form of workplace discrimination, whether direct or indirect, especially on grounds of gender, age, disability, race, religion, nationality, political views, trade union membership, ethnicity, religious denomination, sexual orientation, or

Grupa Azoty Zakłady Chemiczne Police S.A. Page 80 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) whether an employee is employed under a fixed-term or open, full-time or part-time contract, shall be prohibited. The Company’s Articles of Association define the rules for appointment of the Management Board and Supervisory Board members and for election of the Management Board and Supervisory Board members by employees, while the Collective Bargaining Agreement defines the qualification requirements and the rules of remuneration for the positions classified as managerial. Over the years, the Company has developed rules that support non-discrimination and diversity, and ensure equal opportunities for professional development of the workforce, and thus contribute to higher work efficiency and the Company’s development.

8.14. Remuneration policy Remuneration system at the Parent The Company has in place a remuneration system defined in the Company’s Collective Bargaining Agreement of August 2nd 2011, as amended. The key component of remuneration is the base pay, whose amount depends on the pay grade and the range of job groups defined in the Company’s Job Qualification Rating. When determining an employee’s pay grade, the following factors are taken into account: • complexity of the work performed, • the employee’s qualifications, • working conditions. The Company’s Collective Bargaining Agreement provides for a number of additional remuneration components, including: • allowance for work under special conditions, • team leader allowance, • allowance for serving as a jumper, • allowance for serving as a spreader, • allowance for serving as a chemical rescue worker, technical rescue worker or member of the SPOT consultancy team, • a lump sum allowance for work in the basic system with a three-shift work time schedule, • a lump sum allowance for work in the basic system with a two-shift work time schedule, • a lump sum allowance for work in the basic system with a two-shift work time schedule (three- team work schedule), • allowance for work on Sundays, statutory holidays, Company holidays, for night-time work and second-shift work, • allowance for serving as an internship supervisor, • allowance for overtime work, • allowance for the time of on-call technical emergency services, • allowance for non-standard loading and unloading activities. The employee remuneration policy is strictly linked to the Company’s financial results. An increase in remuneration in a financial year depends on the Company’s financial condition and profits earned. This is achieved through the use of a remuneration growth index which takes into account the above parameters. The Management Board and the trade unions sign a remuneration agreement defining the remuneration growth rate and the remuneration components to which the growth rate will apply. Certain remuneration components (annual and other bonuses) depend on profits earned by the Company. The annual bonus is paid if the Management Board adopts an appropriate resolution and provided that a predefined threshold of pre-tax profit per employee was reached in the preceding year. The bonus is paid after the Management Board has examined and approved the financial statements for the preceding financial year. The rules for awarding annual bonuses are set out in the Rules of the Annual Bonus Scheme. The Company operates an Incentive Scheme based on the Strategic Score Card, whose rules are specified in the Rules for Granting Bonuses to the Employees of Grupa Azoty Zakłady Chemiczne Police S.A. The annual amount of the Bonus Fund is established by the Management Board in agreement with trade unions. The amount depends on the Company’s economic condition, current availability of funds (taking into consideration the Company’s needs and investments), as well as financial results delivered for the periods preceding the period for which the Fund’s amount is determined. A bonus consists of the base component (representing 70% of the Bonus Fund and depending on the

Grupa Azoty Zakłady Chemiczne Police S.A. Page 81 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise) achievement of defined targets) and the discretionary component (representing 30% of the Bonus Fund established and based on results of periodical assessment carried out by the immediate superior). The rules for granting annual and other bonuses to employees are set out in the Rules for Granting Bonuses to the Employees of Grupa Azoty Zakłady Chemiczne Police S.A. and the Rules of the Annual Bonus Scheme. Remuneration rules and amounts of remuneration for management personnel On March 29th 2017, the Extraordinary General Meeting passed Resolution No. 5 to approve the rules of remuneration for members of the Company’s Management Board. According to the resolution, the remuneration comprises a fixed component and a variable component. The Company’s Supervisory Board was authorised to determine the amounts of the fixed remuneration component for individual Management Board members. On March 31st 2017, by Resolution No. 66/VII/17, the Supervisory Board approved the ‘Remuneration Policy for members of the management and supervisory bodies of the Group companies’, which has since been updated on an ongoing basis, whenever grounds existed. The most recent update was made on January 16th 2020 by Supervisory Board Resolution No. 52/VIII/20 on approval of the updated ‘Remuneration policy for members of the management personnel of Grupa Azoty Group companies’, which was subsequently amended/updated by Resolution No. 197/VII/18 of April 26th 2018 and Resolution 254/VII/18 of October 1st 2018. Furthermore, 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 for individual Management Board members (depending on a member’s position on the Management Board). Remuneration of Management Board members comprises: • fixed monthly remuneration (monthly base pay). The fixed remuneration amount is determined by the Company’s Supervisory Body based on a tariff prepared for each reference group and updated by Grupa Azoty S.A.’s Corporate Supervision Department by the end of the first quarter of each year, which in turn is based on an announcement by the President of the Statistics Poland (GUS) concerning the average monthly salary in the business sector, net of payments from profit for the fourth quarter of a given year, unless the generally applicable provisions suspend the indexation of such remuneration. The fixed remuneration is reduced by the amount payable for the days on which no work was performed by a Management Board member; • variable remuneration. The amount of variable remuneration depends on the progress in the delivery of management objectives (defined and approved by the Parent’s Supervisory Board) and is paid in accordance with the rules stipulated in Resolution No. 5 of the Company’s General Meeting of March 29th 2017, the Act on Rules of Remunerating Persons Who Direct Certain Companies of June 9th 2016 and the Act on State Property Management of December 16th 2016. Rules for determining the variable remuneration of Management Board members Variable remuneration is the variable component supplementing the pay of a Management Board member for the financial year of the Company. Its amount depends on the degree of achievement of management objectives. On March 29th 2017, the Extraordinary General Meeting passed a resolution on the rules of remuneration for members of the Parent’s Management Board. Then, by way of a resolution dated March 31st 2017, the Supervisory Board adopted the Remuneration Policy for the management personnel of Grupa Azoty Group companies, which is updated as needed. The ‘Rules of Variable Remuneration of Members of the Management Boards of the Grupa Azoty Group Companies’ is an appendix to the Remuneration Policy. The key provisions of the Rules are as follows: • the variable component of remuneration is calculated based on the degree of achievement of management objectives (shared and individual targets) and is conditional upon the achievement of the key target, • payment of variable remuneration is conditional upon achievement of the minimum level of the key target defined by the Supervisory Board for a given year, • shared and individual targets are measurable, • the amount of variable remuneration depends on the degree of achievement of shared and individual targets, • the weights of the targets are set for shared and individual targets, with the proviso that the sum of weights of shared targets should be equal to the sum of weights of individual targets, and the sum of weights of all the targets may not exceed 100%.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 82 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

All Management Board members have the same shared targets. Shared and individual targets are designed to support the delivery of the Grupa Azoty Strategy and are outlined in the annual and long- term budgets. As for individual targets, they are assigned by the Supervisory Board to be performed during a financial year by each Management Board member. The Supervisory Board assigns to each Management Board member two to six individual targets. The amount of variable remuneration of a Management Board member depends on the degree of achievement of shared and individual targets as defined in the MBO Sheet approved by the Supervisory Board. Table 41. Remuneration of Management Board members for holding office at the Parent for the 12 months of 2019 Remuneration paid Remuneration fixed variable Total potentially remuneration remuneration due* components components

Tomasz Panas 528.4 13.4 541.8 552.8 Włodzimierz Zasadzki, Ph.D. 528.4 20.6 549.0 539.3 Anna Tarocińska 369.9 9.9 379.8 387.0 * Remuneration potentially due includes a provision recognised for variable remuneration, which is granted depending on the performance and achievement of management objectives, in accordance with the rules of variable remuneration approved by the Supervisory Board. The remuneration potentially due is expected to be paid in 2020.

Table 42. Remuneration of Supervisory Board members for holding office at the Parent for the 12 months of 2019

Remuneration paid Remunerati on Total fixed variable potentially remuneration remuneration due components components

Agnieszka Dąbrowska 79.3 0.0 79.3 0.0 Joanna Habelman 51.2 0.0 51.2 0.0 Kądziołka Mariusz 38.9 0.0 38.9 0.0 Mirosław Kozłowski 84.4 0.0 84.4 0.0 Bożena Licht 79.3 0.0 79.3 0.0 Andrzej Malicki 45.1 0.0 45.1 0.0 Andrzej Rogowski 34.4 0.0 34.4 0.0 Maria More 45.1 0.0 45.1 0.0 Iwona Wojnowska 34.4 0.0 34.4 0.0

For information on other transactions with members of the Company’s management and supervisory bodies, see Note 33 to the consolidated financial statements for the 12 months ended December 31st 2019. Rules governing remuneration of key management personnel Persons holding key managerial positions at the Company are hired under management contracts. The rules governing remuneration of key management personnel are set forth in the Rules Governing Remuneration of the Parent’s Employees hired under management contracts. Remuneration of management personnel is determined in a management contract pursuant to a resolution of the Parent’s Management Board, in accordance with the table of fixed remuneration of management personnel. An employee’s gross remuneration, defined in the employment contract as a multiple of the average remuneration at the Company as at December 31st of the previous year, consists of two components:

Grupa Azoty Zakłady Chemiczne Police S.A. Page 83 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

• fixed lump-sum gross remuneration defined in the management contract, • gross annual bonus granted by the Parent’s Management Board. The nominal amount of the annual bonus is 3.5 times the fixed lump-sum gross remuneration defined in the management contract. The nominal amount of the bonus may be additionally increased by 20% of the nominal amount of the employee’s bonus if the degree of achievement of the targets specified in the MBO Sheet exceeds 100%, but not more than 120%. The amount of annual bonus calculated based on an assessment of delivery of the targets set by the Parent’s Management Board and defined in the MBO Sheet for individual employees hired under management contracts is subject to approval by the President of the Management Board. Evaluation of the remuneration policy The remuneration policy, defined through negotiations with the social partners, is closely linked to the Company’s financial performance. The remuneration growth index for any given year is determined based on the Parent’s current and expected economic condition. The amounts of certain remuneration components, such as the annual bonus, also depend directly on the Company’s financial results and the degree of achievement of the targets set for individual managers.

8.15. Agreements between the Parent and Management Board members On May 30th 2018, the Company’s Supervisory Board concluded management contracts for the duration of holding the position of President of the Management Board as well as post-employment non-compete agreements with the Management Board members. On October 1st 2018 and January 16th 2020, the management contracts and post-employment non-compete agreements were amended. 8.16. Sponsorship, charitable or similar activities Supporting the development of local communities is among the integral objectives of the Company’s strategy. Activities in this area are conducted based on a plan of social and sponsorship activities. The plan envisages, inter alia, the execution of promotion and advertising contracts and making donations. Cooperating partners include local and regional clubs, associations and foundations. Support is also provided to individuals. The Company builds its socially responsible image by supporting: • both professional and amateur sports, • cultural initiatives, including mass cultural events, • educational institutions for children and youth, • research and scientific programmes, • regional environmental initiatives, • social campaigns. Promotional activities with a countrywide and international reach, which contribute to strengthening the image of the entire Grupa Azoty Group, are carried out by the Group’s corporate department based in Tarnów. Cultural initiatives The Company was the Main Partner of Maggie Piu’s painting exhibition. The artist’s vernissage was held at the Mieczysław Karłowicz Philharmonic in Szczecin. The exhibition opening was enlivened by a performance given by Szczecin Philharmonic musicians. The Company collaborated with the Szczecin Polish Radio, becoming a Partner for two Blackout concerts and Jerzy Kurcyusz’s ‘Na przedpolu Jałty. Wspomnienia z tajnej służby w dyplomacji’ (memoirs of secret diplomatic service), an audiobook broadcast by the radio. Sports initiatives In 2019, the Company continued its cooperation with professional sport club, including the premier league football team Pogoń Szczecin and the women’s volleyball team Chemik Police, which won the Polish Cup in 2019 and competed in the European Champion League. The Company also continued its cooperation with Marcin Lewandowski, multiple European indoor champion, and the 1,500 metre bronze medal winner at the World Championship in 2019. Grupa Azoty Police became the Main Partner of the Szczecin Fencing Association, which in 2019 organised the Polish Seniors Épée Cup and North Poland Foil and Épée Cups for children and youth.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 84 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

To meet the expectations of local communities, the Company also supported amateur sports clubs bringing together local residents. The cooperation included: • Agreement with the Chemik Police Football Club, competing in the Third League. • The club also runs the Youth Football Academy of Police for the youngest residents of Police (many of them children of Grupa Azoty Police employees). In 2019, the Academy joined the elite club of football schools certified by the Polish Football Association, receiving a bronze certificate; • The ‘Champion’ Student Sports Club for table tennis players in various age groups; • Sports events, including the extreme racing event ‘Wild Weekend’, the Santa Run and the Janusz Korczak Run. Promotion of national tradition and patriotic attitudes An important component of the Company’s social and sponsorship activities is support for initiatives designed to cultivate and foster Polish traditions and national identity and to strengthen national, civic and cultural awareness. Therefore, for another consecutive year the Company partnered with the Foundation for Polish Values, supporting Poles in Kresy (Eastern Borderlands of pre-WW2 Poland). Health promotion Blood Donor Association of the Republic of Poland – H. Dunant Blood Donor Club in Police, supported by Grupa Azoty Police, has been active in the county of Police, promoting the idea of voluntary blood donation. Several blood donor sessions were carried out on the Company’s premises. The association, acting under the Company’s patronage since 2018, celebrated its 45th anniversary in 2019. Education of children and youth Once again, the Company awarded scholarships to the most talented students of the Chemical Technology Secondary School (in the class under Grupa Azoty Police’s patronage) at the Ignacy Łukasiewicz School Complex of Police. In December 2019, the Company signed a patronage agreement and memorandum of understanding with the Szczecin Electrical and Electronic School Complex. As part of the cooperation, Grupa Azoty Police offered scholarships for the best students, internships and industry-specific training for teachers. The Company also took on patronage of classes for mechatronics and automatics technicians. The Company provided prizes for the Talenty 2019 Passion - Profession - Vocation competition organised as part of the ‘Discover Your Talent’ European Week of Professional Skills. Charitable giving policy Charitable giving is one of the components of the Company’s plan of social and sponsorship activities. The objectives for which the Company may grant a donation are defined in detail in the Charitable Donation Rules. These initiatives are usually related to the promotion of sports and healthy lifestyles, social welfare assistance, holidays for children and youth, culture and arts, or religious worship. The initiatives supported by the Company in 2019 included: • covering the cost of travel of various age groups of scouts and guides of the 28 Fire Scout Group to summer camps; • support for the organisation of the Łarpia Sail Festival; • funding the prizes in a chemical competition for primary and junior high school students in the Szczecin Province; • support for the organisation of the ‘Mystery of Christ’s Passion’ performance; • support for a Company employee, an award-winning weightlifter; • support for the organisation of the tenth Three Wise Men Procession. The Company’s donations are granted mainly to applicants from the Szczecin Province, but, in justified cases, also from other regions. Each application is examined separately. Corporate social responsibility Bearing in mind that employees represent the principal asset of any business, the Management Board once again invited the 2019 retirees to official ceremonies. The initiative was an excellent opportunity to thank long-time employees for their commitment and accomplishments. In December 2019, Grupa Azoty Police signed agreements with the West Pomeranian Business School and the Poznań Banking School of Poznań − Faculty of Economics in Szczecin. Thanks to the cooperation with these higher education institutions, the Company’s employees may enrol for higher education on favourable financial terms.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 85 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

The Company organised workshops on recruitment interviews, CV writing and self-presentation before a camera for the students of the West Pomeranian University of Technology. The Company responded to the students’ needs by providing them with selected information which was later used in many thesis papers. More university and secondary school students took the opportunity to take a tour of the plant. University and secondary school students from the region readily attended the internship and trainee programmes offered by the Company. As part of its CSR activities, the Company funded educational materials for three primary schools. Grupa Azoty Police came to include 17 practical vocational training instructors. Experts from the Company’s various departments, selected to be mentors of university and secondary school trainees, completed a pedagogical course. The Company co-organised the Children’s Day Family Festivities. The event, the main organiser of which was the Board of Housing Estate No. 6 in Police, was addressed to the Police residents. The participants include Company employees and their families. The Company was a Partner of the ‘Radio Szczecin on Holiday’ campaign in Rewal. This promotional event was addressed to all those on holiday by the seaside. In 2019, Grupa Azoty Police became the patron of the 11th Conference of Waste-Free Technologies and Waste Management in Industry and Agriculture, organised by the West Pomeranian University of Technology of Szczecin. The Company also sponsored the ‘Each Bird Has Its Roof’ environmental campaign run by the local ‘Łarpia’ Environmental Association. The ‘Ostoja’ Teetotal Society was again granted financial support.

8.17. Report on entertainment expenses, legal costs, marketing costs, public relations and social communication expenses, and management consultancy fees, and a report on compliance with best practices issued pursuant to the Act on State Property Management In 2019, the Company spent PLN 26,556 thousand on entertainment and legal, marketing, public relations, social communication and management consultancy services. Of that amount PLN 19,374 thousand were expenditures on public relations services, PLN 3,908 thousand were marketing expenditures and PLN 1,111 thousand were entertainment expenditures. These expenditures were incurred, among other things, on the Company’s image building through: • sponsorship and promotional activities; • support of local and regional events and entities; • implementation of CSR initiatives; • organisation of events for employees and their families; • organisation of conferences and investor meetings; • internal communication activities. For a detailed description of public relations projects, see Section 8.16. The marketing activities included promotion of product brands. The Company undertook advertising campaigns designed to reinforce brand image and drive sales, while strengthening the visual identity of the Grupa Azoty brand and building the brand’s association with products. In 2019, the amount of legal costs was PLN 1,085 thousand and management consultancy fees came to PLN 1,079 thousand. Since by the date of this Report no best practices were issued under Art. 7.3 of the Act on State Property Management of December 16th 2016 (consolidated text: Dz.U. of 2019, item 1302, as amended), the report on compliance with best practices has not been prepared.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 86 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

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

Table 43. Fees payable to auditors for services rendered to the Parent

Item 2019 2018 Audit firm – Ernst & Young Audyt Fees for the audit of the full-year separate and consolidated financial statements and audit of the consolidation package 100 100 Other assurance services, including: fees for the review of the half-year separate and consolidated financial statements and review of the consolidation package 49 49 Fees for agreed-upon procedures performed in connection with the Company’s issue prospectus 289 0

Table 44. Fees payable to Ernst & Young Audyt Polska Sp. z o.o. sp. k. and other EY member firms for services rendered to the Group subsidiaries Item 2019 2018 Audit firm – Ernst & Young Audyt Fees for the audit of the full-year financial statements and audit of the consolidation package 89 89

9.2. Environmental performance The Company constantly monitors its ability to meet any newly legislated environmental requirements, and actively participates in social consultation of draft legal acts. Administrative decisions The Company operates based on an integrated permit dated January 9th 2014, as amended. The validity of the integrated permit is monitored on an ongoing basis, as a result of which in 2019 the Company received three decisions amending the permit. • The first amendment, dated February 8th 2019, resulted, among others, from introducing an additional procedure for handling waste under code 06 11 83 – iron (II) sulphate waste, meeting new legal requirements for developing fire prevention plans, increasing the volume of waste under code 17 01 01 – concrete waste and rubble from demolition and repair, collected from third parties for reuse in the R5 process; • The second amendment, dated June 18th 2019, was related to aligning the decision with the BAT conclusions for large combustion plants, in accordance with Directive 2010/75/EU of the European Parliament and of the Council. The Company was granted a temporary derogation (until December 31st 2027) to adapt the EC II fuel combustion plant with respect to emissions of main pollutants (SO2, NOx, particulate matter) into the air; • The third amendment, dated November 26th 2019, was made to bring the permit into compliance with the new requirements of the Waste Act (securing claims). In 2019, the Company also received:

Grupa Azoty Zakłady Chemiczne Police S.A. Page 87 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

• Three decisions issued by the Marshal of the Szczecin Province recognising hydrolytic acid, iron sulfate, slag, bottom ash and boiler dust as by-products; the decisions were issued for a period of ten years; • Decision of the Szczecin Regional Water Management Authority - PGW WP – water-law permit for discharge of rainwater and meltwater from the Mijanka harbour. The decision was issued for a period of 20 years. Reporting In 2019, the Company complied with the environmental reporting requirements for 2018 and 2019 in a timely manner. Assessment of the risk of soil, land and groundwater contamination with hazardous substances. Based on regular risk assessment, no risk of soil, land or groundwater contamination was identified in 2019. External inspections In 2019, one inspection was carried out by the Szczecin Provincial Inspectorate for Environmental Protection concerning prevention of major industrial accidents and compliance with legal requirements pertaining to environmental protection. No irregularities were identified during the inspection and no post-inspection recommendations were issued. Technical safety During the scheduled maintenance shutdown at the Nitro Business Unit in Q2 2019, discontinuities in welding joints of the 11E311 (ammonia production line A) and 12E311 (line B) boilers at the Synthesis Gas Unit were detected, resulting in prolonged shutdowns of the ammonia and urea production units. Inspections related to prevention of major industrial accidents took place in June 2019. No violations or breaches were identified by the Szczecin Provincial Inspectorate for Environmental Protection. As the irregularities identified by the Szczecin Provincial Headquarters of the National Fire Service and the Police County Headquarters of the National Fire Service were promptly rectified, no administrative decisions were issued. In Q3 2019, one major industrial accident (as defined in the Environmental Protection Law) was reported. On August 18th 2019, there was an ignition of gas released during removal of a plugging on the inlet stub of the 12D411 methanation reactor during the start-up of line B of the Synthesis Gas Unit, as a result of which two employees of Grupa Azoty Police Serwis were burnt. As the inspection carried out by the Szczecin Provincial Inspectorate for Environmental Protection after that accident did not reveal any violations or breaches attributable to the Company, no post-inspection rulings were issued. OHS management In the area of occupational health and safety there were no major events of a non-recurring nature during the reporting period which could materially affect the Company’s financial performance.

9.3. Awards and distinctions 2019 brought a number of distinctions that the Police-based Company received either independently or as a member of the largest chemical group in Poland. The most important of them included: • the Transparent Company of the Year 2018 distinction in the sWIG80 category, • an acknowledgement from the Minister of National Education for Grupa Azoty Zakłady Chemiczne Police S.A. for initiatives supporting vocational education, • the ‘Grupa Azoty – Sports Patron of the Year’ in the 66th Poll for the Best Athlete of the Szczecin Province in 2019, • Tomasz Panas, Vice President of the Management Board, among the winners of the 2019 edition of the ‘Together We Can Accomplish More’ contest, in the Personality of the Year category, • 30 employees received long-service medals awarded by the President of the Republic of Poland. As in 2018, the medals were presented during the Well Serving Employees Gala event held as part of the Chemist Day celebrations, • during the second edition of ‘The Most Reliable One in the Polish Economy’ awards and distinctions gala, organised by ISBnews agency, Grupa Azoty Police received a distinction in the ‘Most Reliable One in the Fuel and Chemical Sector’ category for the launch of the Polimery Police project,

Grupa Azoty Zakłady Chemiczne Police S.A. Page 88 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

• distinction in the ‘Pearls of Business’ competition for Grupa Azoty Polyolefins S.A. in the ‘2019 Economic Event’ category for the launch of the Polimery Police project.

10. Other information Non-financial statement Pursuant to Art. 49b.11 of the Accounting Act, the Company is exempt from the obligation to prepare a non-financial statement as its higher-tier parent issues a consolidated non-financial statement covering all companies of the Grupa Azoty Group as well as their respective groups. The Company’s parent is Grupa Azoty S.A. with its registered office at ul. E. Kwiatkowskiego 8, Tarnów, Poland. Explanation of differences between actual results and financial forecasts As no forecasts for 2019 were published, the position of the Parent’s Management Board concerning achievement of such forecasts is not presented. Litigation The Company is not party to any proceedings concerning liabilities or receivables that would meet the materiality criteria defined in the Minister of Finance’s Regulation on current and periodic information, dated March 29th 2018 (consolidated text: Dz.U. of 2018, item 757). The total value of all pending court proceedings does not exceed 10% of the Group’s equity. Material related-party transactions on non-arm’s length terms In 2019, the Group did not enter into any related-party transactions on non-arm’s length terms. Parent’s branches (divisions) The Parent does not operate any branches or divisions outside of its principal place of business. Material events after the reporting date On January 9th 2020, INFRAPARK Police S.A. w likwidacji (in liquidation) was deleted from the Business Register. On January 29th 2020, the District Court for Lublin-Wschód in Lublin, with its seat in Świdnik, 6th Commercial Division of the National Court Register, registered the merger of Koncept Sp. z o.o. and PROZAP Sp. z o.o. As a result, Koncept Sp. z o.o. ceased to exist as a legal entity, and the Company became a shareholder of PROZAP Sp. z o.o. On January 17th 2020, the Polish Office of Competition and Consumer Protection (UOKiK) issued a decision clearing the proposed concentration whereby Grupa Azoty, Hyundai Engineering, Korea Overseas Infrastructure & Urban Development Corporation and Grupa Lotos would establish a joint venture operating under the name of Grupa Azoty Polyolefins. The application for the decision was filed on December 23rd 2019. On January 29th 2020, the Management Board of GA Polyolefins and Przedsiębiorstwo Robót Czerpalnych i Podwodnych sp. z o.o. concluded a contract for the execution of the project “Planning and performing dredging work to increase depth from 10.5 to 12.5 metres as part of the Polimery Police project” for a remuneration of PLN 15,283,752.50. Impact of coronavirus spread and COVID-19 pandemic on Company’s and Group’s business The Company’s Management Board is keeping track of the developments around the COVID-19 pandemic and its unfolding impact on the Company’s and its Group’s business. In order to ensure that the Company and the other entities of its Group can operate as smoothly as possible, procedures have been put in place to ensure immediate response by the relevant services. In addition, the Company has issued instructions to minimise the risk of infection to employees. As at the time of preparation of this information, the Group did not record any major declines in sales volumes, any disruptions in the supply chains of feedstock, materials and services, or increased sick absence rates among staff that would interfere with the continuity of production. The Company is focused on identifying risks associated with the epidemic threat in order to take preventive measures sufficiently in advance. It has identified potential risk areas related to the COVID-19 pandemic that can materially affect its future financial performance. These risks include: 1. Supply chain and sales disruptions due to transport constraints (particularly in the case of

Grupa Azoty Zakłady Chemiczne Police S.A. Page 89 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

transport to high-risk areas in terms of COVID-19 infection) caused by issues attributable to transport service providers, a reduction in the number and types of available means of transport, increased delivery costs due to higher freight rates (particularly along the export directions), temporary border closures, and other related constraints. Constraints have already been encountered in the availability of transport to carry exported goods. 2. Potential temporary disruptions in the timely delivery of capital and maintenance projects at the Company or other entities of its Group due to various constraints or limited availability of contractors, possible delays in the lead times of materials and equipment, or actions by government bodies issuing decisions in administrative processes. 3. Disruptions in the continuity of production processes due to potentially reduced availability of staff resources. 4. Potential threat to the liquidity of some customers suffering from payment backlogs. 5. Exchange rate fluctuations. 6. Sales disruption, by segments: Fertilizers No decline in fertilizer demand has been recorded as at the date of this Report. Negative implications of the virus crisis may potentially affect export sales. However, any decline in sales to foreign customers may be offset by falling imports resulting in an increased volume of domestic sales. The downscaling of transport activity is reflected in lower purchases of fuel and fuel additives reducing exhaust emissions (such as NOXy®). The NOXy® distributors are beginning to report problems with the fulfilment of contracts, especially in the case of exports. Pigments The current situation is having an adverse impact on the pigments market in Europe. Italy has been the first country to mandate a complete shutdown of the industrial sectors not related to public security. As at the time of issuing this Report, it is impossible to sell titanium white on the Italian market. There are reasonable concerns that similar restrictions will be introduced by France and Germany. No clear forecasts are available – on the one hand a decline in demand is expected, but on the other demand could rise due to constrained supply from China. The above assessment has been prepared based on the Company’s best knowledge as at the date of this Report. However, the actual magnitude of future effects of the COVID-19 outbreak and its impact on the Group’s business is currently unknown and cannot be estimated, as it depends on fast-changing factors that are beyond the Company’s control. Therefore, it is not yet possible to reliably determine the impact of the COVID-19 pandemic on the Company’s operations, business metrics, prospects and financial condition, including the delivery of investment projects, or on other entities of the Group. In the near term, however, it cannot be ruled out that the risk of a significant adverse impact of COVID-19 on the Company’s and its Group’s business may escalate.22

22For details, see Current Report No. 24/2020 “Grupa Azoty Zakłady Chemiczne Police’s position on impact of coronavirus spread and COVID-19 pandemic on Company’s and its Group’s business” of March 26th 2020.

Grupa Azoty Zakłady Chemiczne Police S.A. Page 90 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Index of tables Table 1. Parent’s equity interests in subordinated entities at December 31st 2019 ...... 5 Table 2. Number of employees at the Grupa Azoty Zakłady Chemiczne Police Group ...... 10 Table 3. Number of employees at the Parent ...... 10 Table 4. Number of employees at consolidated subsidiaries* ...... 10 Table 5. Number of Group employees: annual average and at the end of 2019...... 10 Table 6. Number of employees at the Parent: average for the year and as at the end of 2019 .... 10 Table 7. Number of employees at consolidated subsidiaries: annual average and at the end of 2019* 10 Table 8. Employee turnover at the Group between January 1st and December 31st 2019 ...... 10 Table 9. Employee turnover at the Parent between January 1st and December 31st 2019 ...... 11 Table 10. Structure of the Group’s workforce by education ...... 11 Table 11. Structure of the Parent’s workforce by education ...... 11 Table 12. Structure of the Group’s workforce by length of service ...... 11 Table 13. Structure of the Parent’s workforce by length of service ...... 11 Table 14. Parent’s production volumes by product [tonnes] ...... 13 Table 15. Consolidated revenue by product ...... 14 Table 16. Consolidated financial results ...... 36 Table 17. Financial results of the Parent ...... 36 Table 18. Performance by segment in 2019 ...... 37 Table 19. Group’s costs by nature of expense ...... 39 Table 20. Parent’s costs by nature of expense ...... 40 Table 21. Structure of the Group’s assets ...... 40 Table 22. Structure of the Group’s equity and liabilities ...... 41 Table 23. Structure of the Parent’s assets ...... 41 Table 24. Structure of the Parent’s equity and liabilities ...... 42 Table 25. Profitability ratios ...... 43 Table 26. Liquidity ratios ...... 44 Table 27. Operating efficiency ratios ...... 44 Table 28. Debt ratios ...... 44 Table 29. The Group’s liabilities under bank loans as at December 31st 2019* ...... 45 Table 30. The Group’s liabilities under borrowings from related parties as at December 31st 2019* 46 Table 31. The Group’s liabilities under non-bank borrowings as at December 31st 2019* ...... 46 Table 32. Loans advanced to subsidiaries as at December 31st 2019 ...... 47 Table 33. Guarantees provided by the Parent as at December 31st 2019 ...... 47 Table 34. Sureties provided by the Parent as at December 31st 2019 ...... 48 Table 35. Parent shares held by Parent’s management personnel ...... 61 Table 36. Recommendations concerning the Parent shares between January 1st 2019 and the date of this Report ...... 62 Table 37. Stock performance ...... 62 Table 38. Shareholding structure as at the date of this Report ...... 70 Table 39. Shareholding structure as at December 31st 2019 ...... 70 Table 40. Shareholding structure as at December 31st 2018 ...... 70 Table 41. Remuneration of Management Board members for holding office at the Parent for the 12 months of 2019 ...... 83 Table 42. Remuneration of Supervisory Board members for holding office at the Parent for the 12 months of 2019 ...... 83 Table 43. Fees payable to auditors for services rendered to the Parent ...... 87

Grupa Azoty Zakłady Chemiczne Police S.A. Page 91 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

Table 44. Fees payable to Ernst & Young Audyt Polska Sp. z o.o. sp. k. and other EY member firms for services rendered to the Group subsidiaries ...... 87

Index of figures Figure 1. Structure of the Group as at December 31st 2019 ...... 6 Figure 2. Parent’s organisational chart as at the issue date of this Report ...... 9 Figure 3. Revenue by main product groups and other sales ...... 14 Figure 4. The Group’s sales by geographies (by revenue)* ...... 15 Figure 5. Structure of capital expenditure by type ...... 21 Figure 6. Monthly average prices of ammonia and urea [USD/t] ...... 30 Figure 7. Monthly average prices of NPK and DAP fertilizers [USD/t] ...... 32 Figure 8. Market prices of natural gas [EUR/MWh] ...... 34 Figure 9. Monthly average prices of titanium white in 2019 [EUR/t] ...... 35 Figure 10. The Group’s revenue by segment ...... 37 Figure 11. The Group’s revenue structure by segment ...... 37 Figure 12. Consolidated revenue of the Fertilizers Segment ...... 38 Figure 13. Consolidated revenue of the Pigments Segment ...... 39 Figure 14. Share performance and trading volumes in 2019 ...... 62

Grupa Azoty Zakłady Chemiczne Police S.A. Page 92 of 93 Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group for the 12 months ended December 31st 2019 (all amounts in PLN ‘000 unless indicated otherwise)

This Directors’ Report on the operations of the Grupa Azoty Zakłady Chemiczne Police Group in the 12 months ended December 31st 2019 contains 93 pages.

Signatures of Members of the Parent’s Management Board

Signed with qualified Signed with qualified electronic signature electronic signature …………………………………………… …………………………………………… Wojciech Wardacki, Ph.D. Tomasz Panas President of the Management Vice President of the Board Management Board

Signed with qualified Signed with qualified electronic signature electronic signature …………………………………………… …………………………………………… Włodzimierz Zasadzki, Ph.D. Anna Tarocińska Vice President of the Member of the Management Management Board Board

Police, April 7th 2020

Grupa Azoty Zakłady Chemiczne Police S.A. Page 93 of 93