Consolidated half-year report including Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 Grupa Azoty Zakłady Chemiczne Police Group Contents 1. General information about the Group .................................................................................. 3 2. Financial condition and assets ........................................................................................... 4 2.1. Assessment of non-recurring factors and events having a material impact on the Group’s business and financial results ......................................................................................................... 4 2.2. Market overview ........................................................................................................... 5 2.3. Key financial and economic data ....................................................................................... 10 2.3.1. Consolidated financial results ........................................................................................ 10 2.3.2. Segments’ financial results ........................................................................................... 11 2.3.3. Sales by product groups ............................................................................................... 14 2.3.4. Operating expenses .................................................................................................... 15 2.3.5. Structure of assets, equity and liabilities ........................................................................... 16 2.3.6. Financial ratios ......................................................................................................... 17 2.4. Financial liquidity ........................................................................................................ 19 2.5. Borrowings ................................................................................................................. 19 2.6. Key projects ............................................................................................................... 21 2.7. Factors which will affect the Group’s results over at least the next reporting period ......................... 23 3. Risks and threats .......................................................................................................... 24 3.1. Strategic management ................................................................................................... 24 3.2. Management of fixed production assets ............................................................................... 26 3.3. Comprehensive customer support ...................................................................................... 27 3.4. Availability of feedstock and materials ............................................................................... 29 3.5. Financial management ................................................................................................... 29 4. Other information ........................................................................................................ 30 4.1. Other material events ................................................................................................... 30 4.2. Material agreements ..................................................................................................... 31 4.3. Sureties and guarantees ................................................................................................. 31 4.4. Shareholding structure ................................................................................................... 32 4.5. Company shares held by management and supervisory personnel ................................................. 33 4.6. Composition of the Management Board and the Supervisory Board ............................................... 33 4.7. Environmental protection ............................................................................................... 36 5. Other information ........................................................................................................ 38 Grupa Azoty Zakłady Chemiczne Police Group Page 2 of 39 Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise) 1. General information about the Group As at June 30th 2017, the Grupa Azoty Zakłady Chemiczne Police Group comprised Grupa Azoty Zakłady Chemiczne Police S.A. (the “Parent”, the “Company”) and: nine subsidiaries (in which Grupa Azoty Zakłady Chemiczne Police S.A. held ownership interests above 50%), including one company in liquidation, one indirect subsidiary, two associates (in which the Company holds ownership interests below 50%), including one company in liquidation bankruptcy. For a description of the organisation of the Parent and presentation of the Group subsidiaries, see Section 1 of the Directors’ Report on the activities of Grupa Azoty Zakłady Chemiczne Police S.A. and the Grupa Azoty Zakłady Chemiczne Police Group in the twelve months ended December 31st 2016. The Company has for decades been a leading European manufacturer of fertilizers and one of the largest Polish chemical companies. High sales to external markets make it also one of the largest Polish exporters. The Company’s advantages include a titanium white unit of a type unique in Poland, the size of its ammonia, phosphoric acid and sulfuric acid production, as well as strong position in compound mineral fertilizers. Internationally, the Company is recognised not only for its fertilizer production and sales volumes, but also for contributing to progress in the chemical industry and thus to the development of global agriculture. The Company has been successfully marketing new compound fertilizers, best suited to the mineral content of soil, and thus most effective in application and safe for the environment. The wide product range and the ability to customise products have enabled the Company to market its fertilizers in Poland and abroad, on several continents. The Company pays due regard to CSR matters, engaging in projects that support local communities and regional development. Liaising with local authorities, Grupa Azoty Zakłady Chemiczne Police S.A. supports vocational education, with a particular focus on professions useful to the Company. The Company has also partnered with higher education institutions, sharing expertise with students working on their theses in chemistry, environmental protection, management and marketing. Some of the students are subsequently employed at the Company. Table 1. Parent’s interests in subsidiaries as at June 30th 2017 % of shares held Registered Name Share capital by the Parent office/address directly indirectly Grupa Azoty Police Serwis ul. Kuźnicka 1, 9,618 100.00 0.00 Sp. z o.o. 72-010 Police, Poland ul. Kuźnicka 1, Koncept Sp. z o.o. 512 100.00 0.00 72-010 Police, Poland ul. Monopolowa 6, Supra Sp. z o.o. 51-501 Wrocław, 19,721 100.00 0.00 Poland Transtech Usługi ul. Kuźnicka 1, Sprzętowe 9,783 100.00 0.00 72-010 Police, Poland i Transportowe Sp. z o.o. Grupa Azoty Africa S.A. Route de Ngor Villa 132,000 99.99 0.01 w likwidacji (in nr 12, Dakar, Senegal thousand liquidation) ul. Kuźnicka 1, ZMPP Sp. z o.o. 32,617 99.98 0.00 72-010 Police, Poland Page 3 of 39 Grupa Azoty Zakłady Chemiczne Police Group Grupa Azoty Zakłady Chemiczne Police Group Directors’ Report on the activities of the Grupa Azoty Zakłady Chemiczne Police Group for the first half of 2017 (all amounts in PLN ‘000 unless indicated otherwise) ul. Kuźnicka 1, PDH Polska S.A. 1 180,000 84.54 0.00 72-010 Police, Poland African Investment Group Route de Ngor Villa 340,000 54.90 0.10 S.A. (AFRIG S.A.) nr 12, Dakar, Senegal thousand Infrapark Police S.A. ul. Kuźnicka 1, 9,5592/14 9863 w likwidacji (in 54.43 0.00 72-010 Police, Poland liquidation) budchem Sp. z o.o. ul. Moczyńskiego 8/10, 1,201 48.96 0.00 in liquidation bankruptcy 70-101 Szczecin, Poland ul. Kuźnicka 6, Kemipol Sp. z o.o. 3,445 33.99 0.00 72-010 Police, Poland Route de Ngor Villa 33,000 AFRIG Trade SARL 0.00 55.00 nr 12, Dakar, Senegal thousand 2. Financial condition and assets 2.1. Assessment of non-recurring factors and events having a material impact on the Group’s business and financial results Dividends On June 12th 2017, the Management Board passed a resolution to propose to the Annual General Meeting that a dividend of PLN 31,500 thousand be paid to the Company’s shareholders from the net profit earned in January 1st−December 31st 2016. The dividend record date was set as June 30th 2017 and the dividend payment date was July 21st 2017.4 Share capital increase at PDH Polska Spółka Akcyjna On March 29th 2017, the Company’s Management Board decided to acquire up to 5,200,000 Series C new registered shares in PDH Polska S.A., a subsidiary, and on March 31st 2017 the Supervisory Board approved the acquisition.5. On April 5th 2017, the general meeting of PDH Polska S.A. passed a resolution to increase the company’s share capital by way of issue of 5,200,000 new shares. The Company declared its intention to take up, on the first date for exercise of pre-emptive rights, 2,917,875 shares with a par value and issue price of PLN 10 per share. Following the closing of the subscription, on July 11th 2017 the Management Board of PDH Polska S.A. allotted 2,917,875 to the Company, and 2,282,125 shares – to Grupa Azoty S.A. Following the share capital