Directors’ Report on the Operations of Grupa Azoty S.A. and the Grupa Azoty Group for the 12 months ended December 31st 2019 Grupa Azoty Directors' Report on the operations of Grupa Azoty Spółka Akcyjna and the Grupa Azoty Group for the 12 months ended December 31st 2019 (all amounts in PLN '000 unless indicated otherwise) This Directors’ Report presents the key events which occurred in the 12 months ended December 31st 2019 at the Grupa Azoty Group and its parent Grupa Azoty S.A. This Report includes all information which is essential for the assessment of the Group’s and the Parent’s financial condition and assets, including the 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 Page 2 of 146 Directors' Report on the operations of Grupa Azoty Spółka Akcyjna and the Grupa Azoty Group for the 12 months ended December 31st 2019 (all amounts in PLN '000 unless indicated otherwise) Contents 1. General information on the Grupa Azoty Group and its Parent ......................................... 5 1.1. Organisation and structure .................................................................................. 5 1.2. Subsidiaries’ organisational or equity ties ................................................................ 9 1.3. Changes in the organisational structure ................................................................ 13 2. Management policy ............................................................................................ 18 2.1. Parent’s organisational chart ............................................................................. 18 2.2. Changes in key management policies ................................................................... 19 2.3. Workforce .................................................................................................... 19 3. Business overview .............................................................................................. 21 3.1. Business segments .......................................................................................... 21 3.2. Overview of key products ................................................................................. 24 3.3. Sales markets and procurement sources ................................................................ 26 3.4. Seasonality of operations .................................................................................. 28 3.5. Agreements, including credit facility and loan agreements, guarantees and sureties ......... 29 3.5.1. Significant agreements.................................................................................. 29 3.5.2. Loan agreements and annexes......................................................................... 29 3.5.3. Commercial contracts ................................................................................... 30 3.5.4. Insurance agreements ................................................................................... 32 3.5.5. Project co-financing agreements ..................................................................... 33 3.5.6. Other agreements........................................................................................ 33 3.5.7. Agreements between the Grupa Azoty Group companies ........................................ 33 3.5.8. Sureties and guarantees ................................................................................ 34 3.5.9. Agreements concluded after the reporting date ................................................... 36 3.6. Significant events ........................................................................................... 37 4. Growth strategy and policy .................................................................................. 44 4.1. Strategy and growth directions ........................................................................... 44 4.2. Growth prospects and market strategy ................................................................. 46 4.3. Key investments in Poland and abroad .................................................................. 48 4.4. Equity investments.......................................................................................... 51 4.5. Feasibility of investment plans ........................................................................... 52 4.6. Significant R&D achievements ............................................................................ 52 5. Current financial position and assets ...................................................................... 54 5.1. Assessment of factors and one-off events having a material impact on the Group’s operations and financial performance ................................................................................ 54 5.2. Market overview ............................................................................................. 56 5.3. Key financial and economic data ......................................................................... 71 5.3.1. Consolidated financial information ................................................................... 71 5.3.2. Segments’ consolidated financial information...................................................... 71 5.3.3. Structure of consolidated operating expenses ...................................................... 73 5.3.4. Structure of consolidated assets, equity and liabilities ........................................... 74 5.3.5. Consolidated financial ratios .......................................................................... 75 5.3.6. Separate financial data ................................................................................. 77 5.3.7. Separate financial data by segment .................................................................. 78 5.3.8. Structure of separate operating expenses........................................................... 80 5.3.9. Structure of separate assets, equity and liabilities ................................................ 80 5.3.10. Separate financial ratios ............................................................................... 82 5.4. Financial liquidity ........................................................................................... 83 5.5. Management of capital and assets ....................................................................... 83 5.6. Bank deposits ................................................................................................ 84 5.7. Material off-balance-sheet items ........................................................................ 84 5.8. Financial instruments – risk management policy and risk management instruments, objectives and methods ................................................................................................. 84 5.9. Expected financial condition .............................................................................. 87 6. Risk, threats and growth prospects ......................................................................... 88 6.1. Significant risk factors and threats ...................................................................... 88 6.2. Significant external and internal growth factors ...................................................... 93 Grupa Azoty Page 3 of 146 Directors' Report on the operations of Grupa Azoty Spółka Akcyjna and the Grupa Azoty Group for the 12 months ended December 31st 2019 (all amounts in PLN '000 unless indicated otherwise) 7. Shares and shareholding structure .......................................................................... 96 7.1. Total number and par value of Grupa Azoty shares, holdings of the shares by supervisory and management personnel, and interests of such persons in the Parent’s related entities....... 96 7.2. Treasury shares held by the Parent, the Group companies and persons acting on their behalf 97 7.3. Grupa Azoty shares ......................................................................................... 97 8. Statement of compliance with corporate governance standards .................................... 104 8.1. Corporate governance code applicable to the Parent and the place where the text of the code is available to the public ........................................................................... 104 8.2. Information on the Parent’s non-compliance, if any, with the corporate governance standards and reasons for such non-compliance .................................................................. 104 8.3. Internal control and risk management systems ....................................................... 109 8.4. Management standards and systems .................................................................... 111 8.5. Shareholding structure .................................................................................... 112 8.6. Special control powers of securities holders .......................................................... 113 8.7. Rules governing amendments to the Parent’s Articles of Association ............................ 113 8.8. Restrictions on voting rights ............................................................................. 113 8.9. Restrictions on the transferability of securities ...................................................... 114 8.10. Rules governing appointment